by Lynne Strober and Anthony Prinzo, CVA
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The Tax Cuts and Jobs Act is changing how the Internal Revenue Service (IRS) treats alimony and makes other substantial changes that will impact family law practitioners, and their clients.1 Effective Jan. 1, 2019, alimony paid by the payor will no longer be deductible, and will not be taxable to the recipient for federal tax purposes. The relevant IRS code sections are as follows:
Sec. 206. Alimony deduction by payor/inclusion by payee suspended.
Under pre-Act law, alimony and separate maintenance payments were deductible by the payor spouse under Code Sec. 215(a) and includible in income by the recipient spouse under Code Sec. 71(a) and Code Sec. 61(a)(8).
New law. For any divorce or separation agreement executed after December 31, 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse. Rather, income used for alimony is taxed at the rates applicable to the payor spouse.2
The Rule of Thumb Analysis
In New Jersey, our prior rule of thumb was that the alimony paid in most cases was one-third of the difference of the gross income from all sources of the parties. This calculation provided an unofficial alimony amount as a starting point from which negotiations began.
The rule of thumb was not authorized by statute or case law. There were and are specific factors to be utilized to assess the amount of alimony to be paid. In fact, there are cases opposing the use of a formula. However, in negotiating settlements, the rule of thumb was often utilized. If the divorce case was not going to trial, alimony may have been negotiated utilizing the rule of thumb.
Effective Jan. 1, 2019, during settlement discussions, the “Rule of Thumb” must be taken one step further to consider the federal tax law changes.
In taking the rule of thumb one step further, the amount of alimony paid will, in all likelihood, be less than before the Tax Cuts and Jobs Act was enacted. The goal of a revised rule of thumb is to leave the parties in approximately the same tax position on their respective federal returns as before the enacting of the Tax Cuts and Jobs Act. This may be accomplished by tax-effecting the alimony amount.
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