New Jersey is a High-Tax State, How Will the Tax Reform Bill Recently Passed Impact New Jersey Divorces?
I recently wrote about how the Tax Cut and Jobs Act (aka Tax Reform) would impact the tax treatment of alimony commencing in 2019. This angle has been pretty well covered, both nationally and within New Jersey.
Now that a few days have passed and I’ve had the opportunity to further reflect on the recently signed federal legislation, however, it is clear to me that this legislation will also impact New Jersey divorces in a myriad of more subtle ways. In this blog post I’ll attempt to review some of the more nuanced tax changes (not providing tax advice) and attempt to forecast how they may impact New Jersey residents seeking divorce in 2018 and beyond.
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- Increased Child Tax Credit. Currently (subject to a phase-out) parents may receive a tax credit of $1,000.00 per child. The Tax Reform bill has doubled this amount to $2,000.00. In divorces the child tax credits are generally evenly divided between the parties. Accordingly, if there are two (2) unemancipated children from a marriage, both parents will claim one of the children. If there is one child, the parents will alternate even and odd years claiming the children. I like to add language to my divorce agreements that if a parent cannot benefit from a deduction in a given year that they will allow the other parent to claim the child. This provision increases the value of child tax credits and instantly makes it twice as important a consideration for future divorces.
- State and Local Tax Deductions and Property Taxes – The reform no longer allows residents to deduct state or local income or sales taxes. It also limits property tax deductions to $10,000.00. Nobody that resides in New Jersey needs me to remind them that we’re a heavily taxed State with high property values (and high property taxes as well), but how does this impact couples seeking a divorce in New Jersey? For one thing, many experts are forecasting that home values may be reduced, particularly for properties with $10,000.00 or more in property taxes. Just as many people attempted to pre-pay their property taxes before the changes go into effect, there may be more people considering filing for divorce before the values of their homes decrease. For most individuals their largest single asset is their home. If their home decreases in value then so does the marital pot for purposes of equitable distribution. Thus this too requires careful monitoring, particularly as we enter the post-holiday divorce season.
- The Divorce Rate May Momentarily Increase – Maybe I’m subscribing too much to the idea of “chaos theory”, but I’ve always observed money to have greater force than the flapping of butterfly wings. Divorce lawyers tend to refer to tax return season as divorce season. There is a sense of finality to the prior year and the tax refund is often sufficient capital for a divorce retainer. With the holidays firmly in the rear-view mirror, this is the time of the year that divorce consults are generally at their busiest. Whether you are for or against the tax reform bill, it is evident that over the next several years more citizens than not will be paying less in taxes. Moreover, the alimony tax deduction will be taken out of the code commencing January 1, 2019. Thus, for better or worse it figures to be a buy divorce year in 2018.
- Businesses May Be More Profitable While Appearing Less Profitable. With the corporate tax rate being significantly reduced and even pass-through companies receiving greater deductions, the evaluation of businesses and their value will have to be tweaked moving forward. That said, on paper businesses may appear less profitable than usual as from 2017-2022 the 50% cap on business expenses will be replaced by businesses ability to fully deduct certain business expenses (such as a new computer). Accordingly, it may appear on paper that businesses were less profitable and there is perhaps greater room for gamesmanship when addressing these issues.
- Alimony Deduction Eliminated – And yes, the issue I have already covered on this blog but the most well-known impact of the reform – commencing January 1, 2019 you can no longer deduct alimony payments on your taxes and alimony received will no longer be considered income. This portion of the Act will eliminate a 75 year old tax provision and has been referred to by some as a “divorce penalty.”