On January 1, 2019, Congress passed the Tax Cuts and Jobs Act (TCJA), which eliminated the deductibility/taxability of alimony. Unlike some other portions of the TCJA that will lapse after 5 years, this change (alimony no longer being deductible by the payer and taxable to the recipient) appears to be permanent, at least until the law changes again. The State of New Jersey continues to allow alimony payments to be deductible/taxable.
Prior to the commencement of 2019, a payment of alimony was deductible by the payor and taxable to the payee. Essentially, former spouses ended up with more dollars in their pockets while the federal government collected less tax revenue.
Now the payment of alimony is neither taxable to the payee or deductible to the payor. The payor pays income taxes on 100% of his or her earnings, and the payee receives his or her alimony payment tax-free.
For example, if prior to 2019 the payor was earning $300,000 per year and paying $100,00 per year in alimony, he or she would pay tax on $200,000. The payee, assuming no other sources of income, would pay the tax attributable to $100,000 of alimony since his or her income was presumably in a lower tax bracket. This maximized the funds available to the family while minimizing the amount of taxes paid.
Under the new scheme, the entire tax burden on the “family” income is shifted to the payor at the highest possible applicable tax bracket. Overall, the two households may now pay more taxes collectively than prior to 2019. Consequently, there are less available funds to pay expenses and accumulate savings.
What does this mean for divorcing spouses? It is more difficult to determine the amount of alimony to be paid. It will take the Judges and attorneys time to catch up and determine a methodology for determining an appropriate range of alimony under this change. Until then, we will have to wait and see.