For a New Jersey Divorce Lawyer practicing out of Hudson County with many clients coming from the ever growing areas of Jersey City, the main focus in divorce actions in Hudson County-New Jersey and in Northern New Jersey are usually about alimony, child support, child custody, parenting time and the division of assets, tax planning and understanding the tax ramifications of making certain settlements is just as important as the settlement itself. As a New Jersey Divorce Attorney, I am not a tax expert but I do know many important elements of taxation and how settling your divorce in certain ways can help minimize tax implications and maximize tax benefits to help you mitigate any money that must be paid or that will be received to or from your spouse.
ALIMONY AND TAXATION-WHAT YOU NEED TO KNOW
Alimony is a monetary transfer between spouses. Internal Revenue Code 215 (IRC 215) addresses the topic of deducting such payments (the payor). One advantage of paying a higher amount of alimony versus child support is that alimony is tax deductible while child support never is. Furthermore, not only is alimony a tax deduction but it is a deduction that lowers the adjusted gross-income of the payor which is much better than an itemized one. Itemized deductions on the other hand can be limited to 2% of the overall gross income and after that, you lose the tax benefit.
For the person receiving alimony, that person must claim the alimony as income which does provide a benefit in the sense that this “earned income” can be used on the tax filings which permits the spouse to make contributions to an IRA for retirement planning. (IRC 219-f-1). However, if the parties agree that the alimony payments will not be subject to taxation and deductions, that is permitted under the law (Treasury Regulation 1.71-T(b)(A-8)).
The payment and tax planning of alimony can work out for both parties if done correctly. Depending on the income tax brackets of the parties, a plan can be created through income shifting to take advantage of the tax code.
PAYMENTS THAT QUALIFY AS ALIMONY
Payments that are considered alimony according to the Internal Revenue Code must:
1- Be part of a divorce or separation which includes: A court decree or separate maintenance, or a written instrument incident to such a decree.
2-Any other court decree requiring one spouse to make payments for the support/maintenance of the other spouse.
3- A written separation agreement entered into by the spouses.
The alimony payments must also be made in cash which includes, checks, money orders. Services cannot be exchanged and considered alimony.
CHILDREN AND TAX DEDUCTIONS- CHILD SUPPORT IS NOT TAX DEDUCTIBLE BUT THE CHILD TAX DEDUCTIONS CAN BE USEFUL IN YOUR TAX PLANNING
The dependency exemptions are also important in the divorce planning/child custody-support process. Post 1985-The custodial parent is entitled to this tax benefit unless the non-custodial parent and the custodial parent reach an agreement in writing as to the deductions and sign the written declaration Tax Form 8332, (2) Where a multiple support agreement exists. Multiple support relates to where no one person is paying for more than 50% of the support of the child (sometimes when the child lives in a home with the mother, grandparents, uncles, etc., who can argue they all contribute to the home expenses, food, etc.).
The Child Tax Credit
Under President Clinton, The Taxpayer Relief Act of 1997 became effective in 1998. This credit begins to phase out after a certain AGI is reached. So in divorce and tax planning , using the child tax deduction may not be wise for the higher earning spouse because of the income phase outs. The credit itself is not substantial alone in that it is worth about $500 per qualifying child, however, it is always better for the IRS to send you a refund then you sending them a check so try to utilize as many credits as possible and consider it in the divorce.
TAXES AND EQUITABLE DISTRIBUTION IN NEW JERSEY (ASSET DIVISION)
Retirement Plans- One of the bigger assets people tend to have or that couples tend to build their assets with are retirement plans. The company 401k, an IRA, A Roth IRA, etc. To transfer the assets in the plan to a spouse regarding a divorce, a Qualified Domestic Relations Order is needed or a QDRO. This prevents any taxation or penalties form the IRS when this transfer occurs. However, the QDRO does not prevent future taxation when money is taken out of the 401k or other retirement asset.
Marital Residence in New Jersey-Transferring your stake in the property to your spouse will not subject you to taxation, however, if the house is sold, you must check with your accountant to discuss the cost basis and so forth to determine tax liability. The marital residence carries with it many tax benefits if one spouse is to keep the property and if the spouse or the parties agree to sell it, there are many ways to defer tax liabilities if proper tax planning is done. For example, if one spouse takes his or her share of the net proceeds and rolls these proceeds into another property after the divorce and certain conditions are met, each spouse can elect to take advantage of a $125,000 exclusion, if both do, $250,000 is the maximum ($125,000 each). If the property is sold during the divorce, the exclusion may be limited to $125,000 total. If the property is held and to be sold at a later date (more than 2 years after the divorce), the spouse that leaves the residence and loses the “principal residence” status can lose his or her ability to use their $125,000 exclusion for their half interest and then suffer major tax consequences. For information about divorce and settling your case with different assets to work with, read our article on lexis nexis about New Jersey Divorce Lawyer with financial background and how that can help your case.
Let us move on to the TAX FILING STATUS
If you are married or divorced on December 31 of that tax year, that is your tax status. For example, you filed for divorce in November of 2014 but are still married as of December 31, 2014, you would still be considered married for tax purposes. However, if you have your divorce judgment on or before December 31 of the tax year, you are divorced and can claim single on your taxes.
So in conclusion, when you are seeking a divorce in New Jersey, have assets, have children, there are more considerations than, just split everything or whatever wrong information people out there will tell you. There is a lot involved in a divorce in New Jersey. New Jersey is an equitable distribution state, has strict child support and alimony laws among other things so it is very important in planning your future to hire an experienced and caring attorney who will look out for pitfalls and future problems. The team at the Artusa Law Firm is heavily devoted to family law and divorce issues throughout the State of New Jersey including but not limited to: Hudson County, Bergen County, Essex County, Middlesex County and Union County. To setup a consultation in our Jersey City office or over the phone, give us a call on 201-706-7910. To read more bout our work, visit: Artusa Law Firm-Divorce Lawyers of Jersey City.
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