The issue of alimony and divorce is among the topics spouses should get acquainted with before starting the marriage dissolution process. The party who is not self-supporting or has a substantially lower income can be awarded alimony in divorce. When a couple decides on spousal support during divorce, payment amount and duration concern the parties the most. However, it is also necessary to consider the potential tax consequences.
According to the rules governed by the Internal Revenue Service or IRS, alimony can be deductible or not. One of the crucial factors in determining who will cover alimony taxes is the date when the judge made their decisions about the divorce and spousal maintenance.
In this article, we will examine current laws and regulations to answer the question, “Do you have to pay taxes on alimony?”. In addition, we will discuss “How much tax do you pay on a divorce settlement?” and if its amount will change if you decide to sell your property.
Divorce and Taxes
Who pays taxes on alimony depends on when the judge issued the spousal support order and what type of taxation – federal or state – is in question. Couples who divorced on or before December 31, 2018, pay taxes on spousal support in a specific way. The payer deducts it from their total taxable income, and the recipient reports it on their tax return as additional revenue.
Let’s analyze this approach with an example. The paying ex earned $100,000 a year and paid $20,000 on alimony. When filing a tax return, they can deduct $20,000 from income and pay tax on only $80,000 of income per year. The recipient ex, on the contrary, had to add $20,000 to their revenue. If they received $60,000 a year, they had to cover taxes on $80,000 a year.
Taxation of alimony at the federal level changed after January 1, 2019. Under the revised Tax Cuts and Jobs Act (TCJA), the payer can no longer deduct alimony from their annual earnings. Also, the recipient no longer has to report the received financial assistance as income. Now, taxes on alimony are paid by the spouse who provides it, not the one who gets it. However, New Jersey state tax laws are different.
According to NJ ST § 54A:5-1(n), the payer can deduct alimony from their income in the annual return, and the recipient must mark it as additional revenue. Differences between federal and state laws make understanding taxation in New Jersey much more difficult, but it’s not that complicated.
When paying federal taxes, parties must follow the rules of the TCJA. If you need to pay state taxes, you will be guided by the New Jersey Statutes. Who will cover alimony taxes also depends on the agreement between spouses and the terms of the Divorce Decree issued by the court. More information can be found in the New Jersey Tax Guide.
If you wonder, “What happens if I don’t claim alimony on my taxes in New Jersey?” note that there will likely be no consequence since, as a spouse providing support, you will not need to pay taxes on alimony. If you and the other party agree otherwise, you can start taxing support instead of your ex-spouse.
Alimony and Child Support
Either spouse can provide one or two types of financial assistance to the other party. It can be alimony and/or child support. Their purpose is different, as is their taxation. According to the New Jersey Tax Guide, the payer of child support cannot deduct it from their tax payments, while the receiver is not obliged to indicate it as income. So, is child support taxable? The answer will be affirmative for the one who pays it and negative for the one who gets it.
Does alimony count as income? If you are a New Jersey resident and the recipient of spousal maintenance, it is regarded as income that should be reported on your tax return. Is alimony a taxable income for you as a receiver at the federal level? In this case, it works like child support and will not be taxed if your divorce was granted by the court after January 1, 2019.
Is alimony taxable for the recipient if it was ordered by the court before 2019? Yes, if you dissolved your marriage before 2019, you must indicate it as part of your income and pay respective taxes.
Is spousal support taxable to the payer? It also depends on the level of taxation and the year of divorce. When did alimony become non-taxable? A paying spouse can claim a federal alimony deduction for tax purposes only if their marriage ended before 2019. If we are talking about state taxes, the payer can avoid taxation of alimony under New Jersey law regardless of when their divorce decree was issued by the court.
Paying alimony and taxes is one of the most complicated matters following a divorce, so getting a specialist’s advice is reasonable.
Is Alimony Tax Deductible?
Some payers or recipients may be eligible for a federal or state alimony tax deduction.
Is alimony deductible for payers, and when? Parties paying alimony can deduct it from their federal tax payments if their divorce was granted on or before December 31, 2018. Their state taxes are deductible regardless of the date of their marriage dissolution unless they agree with the receiving party not to deduct them from the tax return and specify it in the Divorce Decree.
Are alimony payments tax deductible for recipients at the federal level? Yes, but only if their divorce was granted by a judge:
- After January 1, 2019.
- Before 2019, but the spousal support order was reviewed at the request of one of the parties after January 1, 2019.
When filling out the state tax return declaration, the recipient must always indicate alimony as income unless the payer agrees to the contrary and pays taxes for it.
Is divorce settlement tax deductible, and for whom? According to the rules provided by the IRS, divorcing spouses will not pay taxes on the distribution of assets or liabilities until they decide to sell them. It means the divorce settlement will not be tax deductible for any party after sharing the joint ownership. How the property will be taxed when it is sold is explained by the New Jersey Tax Guide.
When deciding on spousal support, tax-deductible issues often recede into the background. However, they should be considered beforehand, as they may significantly affect the total amount of taxes you will owe following your divorce.
Ways to Reduce Your Taxes During a Divorce
The current federal law clearly defines the conditions for the taxation of alimony for both parties. You will not be able to change them at will. The only way to reduce taxes for the payer is to try to decrease the amount of spousal support.
How to reduce income tax in the state? If you are the recipient and want to decrease taxes on the financial assistance you get, you can ask the paying party not to deduct alimony from their tax return. This is the only way how to avoid paying taxes on alimony in the state.
Does child support reduce taxable income? It does not reduce it; it is not considered an additional income that the recipient must include in the tax return. On the other hand, the payer cannot claim it as a deduction from their tax payments.
Determining who will cover alimony taxes may be affected by several factors. They can be deductible for the recipient or the payer; it depends on the taxation level, the year when the Divorce Decree was issued, and other case-specific circumstances.