Divorce brings with it a host of complications to every part of our lives, from our living situation to our relationship with our children to our finances. According to federal law, the Tax Cuts and Jobs Act (TCJA) has eliminated alimony both as taxable for the payee and as a tax credit for the payor from 2019 to 2025 for divorces finalized after January 1, 2019. But what does New Jersey tax law say regarding alimony? Are there any taxation wrinkles particular to New Jersey law? To make your life easier, it’s worth reading up on how taxation can affect your alimony payments in New Jersey. Keep reading to learn about some unique aspects of New Jersey tax law regarding alimony, and for directed advice about your specific divorce and potential alimony payments, call a Union County alimony attorney today.
Is There a Tax On Alimony in New Jersey?
For the payee, you’re required to report and pay taxes on the alimony you receive. Alimony payments are taxable for the same year as they are received, and it is not subject to tax withholding. As such, there are times when you’ll have to pay more in taxes to avoid paying a tax penalty. You should use the NJ-W-4 form, which you may obtain from your employer, to set up estimated tax payments or to increase how much state tax is taken from your wages. On the other hand, if you’re the payor, you may deduct the amount you pay in alimony to a spouse or former spouse on your taxes.
Unique to New Jersey, the payee may not have to pay taxes on alimony received, so long as the divorcing individuals specify during their divorce negotiations that the payor will not deduct alimony payments from their taxes. Although N.J.S.A. 54A:5-1(n) makes alimony received by the payee taxable, New Jersey courts are allowed to give effect to divorce agreements which indicate that the payor won’t claim alimony as a tax credit. However, this decision needs to be clearly stated in the marital settlement agreement and apply to both exes. If the payor contributes to other monetary benefits for the payee, such as covering the payee’s mortgage from their lender, that is considered to benefit the recipient and needs to be reported.
In fact, given the importance of the marital settlement agreement, it is also important for the divorcing individuals to indicate when payments under the agreement are alimony. Only payments made as alimony and as agreed upon in divorce proceedings can be a tax credit. Any voluntary payments the payor makes beyond a divorce or separation decree do not qualify. Remember that alimony is distinct from child support and as such, shouldn’t be included when you report what you paid in alimony.