Divorce is one of the most stressful events a person can experience. Life becomes more complicated. From finances to living arrangements, relationships with others, and NJ child support, hardly an aspect of one’s life escapes the effects of divorce.
So, what about your taxes? Today, let’s talk about the tax implications of divorce, alimony, and NJ child support. You may find that divorce makes it more important than ever to work with a highly qualified tax preparation firm. If this is the case, rest assured that Halter CPA has the experience and qualifications necessary to keep your tax payments as low as possible after a divorce.
Taxes and Alimony
In the state of New Jersey, alimony was—for a long while—deductible from federal tax payments. This law benefitted those paying alimony, giving them a small, but useful, tax break. Since 2019, however, taxpayers do not receive tax breaks on the alimony payments they make.
Additionally, if you are the person receiving alimony, you are not required to pay income tax on your alimony payments. It is not counted as income and does not need to be reported as such. In short, your entire alimony income remains tax-free.
What about divorces finalized prior to January 1, 2019?
Unless you have modified your divorce agreement to specify that you would like the new laws to apply to your divorce, the Tax Cuts and Jobs Act of 2017 does not apply to your alimony arrangement.
Have State Taxes Changed?
No. These laws only apply to federal taxes. The state of New Jersey permits alimony payments to be deducted from state tax payments.
Additionally, alimony income is taxable under the state of New Jersey. That means that you must report all monies received as alimony payments on your state tax filing.
Is Child Support Taxable?
Child support is never taxable as income and cannot be deducted by the payer. Child support payments are designed to maintain a child’s standard of living, ensuring that essentials like clothing, food, proper housing, and school-associated costs are fully funded by the child’s parents whenever possible.
One caveat: if you have been ordered to pay child support, and fail to meet your financial obligations, your refunds from the state and federal governments can be garnished and rerouted to your child.
How Should Alimony Be Structured Under the Current Laws?
Federal tax law as it currently exists is affecting the outcome of divorce agreements. Now that alimony recipients are not required to pay federal taxes on their alimony income, these payments are more valuable. Conversely, there is less incentive for wealthy alimony payers to make large alimony payments.
Still, each couple has unique financial structures. Consulting a divorce attorney prior to drafting your alimony agreement remains vitally important.
Please contact Halter CPA if you decide our boutique accounting firm is the right fit for your tax preparation needs this year. If you have questions that you would like to ask us before you make your decision, we would be pleased to answer them for you.