I recently had a conversation with someone who was about to get divorced in New Jersey and was happy to have convinced his wife to agree to an alimony term of only a little over one (1) year.
He said that, although he was going to pay a lot more alimony each month than what his wife had requested, his alimony payments would start upon their divorce in October 2015 and therefore would be tax deductible to him.
When I asked him whether he had talked to an accountant about this settlement, his response was to ask me why that was necessary.
My answer was two-fold:
(1) New Jersey Divorce Lawyers are not tax experts–unless of course they have a dual degree and are willing to hold themselves out as “tax professionals.” Although based on my many years of experience as a New Jersey divorce lawyer, I am aware of many of the tax issues which affect my clients, I always make it clear to them that I am not giving them tax advice and that they need to get that advice from a tax professional of their choice.
(2) Based upon the facts that he was giving me, I was concerned that his proposed settlement would result in the “recapture” of a significant amount of his alimony.
Stated as simply as possible, when: (1) the amount of alimony paid in the third year plus $15,000 is less than the amount of alimony paid in the second year, or (2) payments in the second and third years are averaged and this average plus $15,000 is less than the payments in the first year, the person who is paying the alimony will be required to “recapture” in the third year any “excess alimony” over the first and second years and to report the recapture amount as taxable income.
The alimony recipient, who was obligated to report that alimony as taxable income during the first two years, is then entitled to a deduction for the recapture amount.
The exclusions from the “recapture rule” are: (1) payments made under a temporary support order; (2) payments required over a period of at least three calendar years based on a fixed percentage of income from a business, property, salary or self-employment; and (3) payments that decrease because of the death of either party or the remarriage of the alimony recipient.
Many people are completely unaware of the existence of the alimony recapture rule. That is why your choice of a lawyer really does matter.
Salvaggio Law Group LLC devotes its entire practice to New Jersey Divorce and Family Law matters. We understand how seemingly simple issues can often be much more complex and that you must always seek expert tax advice from a tax professional. If you want to talk, please call us at (973) 455-1220 or fill out the Contact Form on our website.