As I wrote in December, the Tax Cuts and Jobs Act enacted at the end of last year, changed the taxability of alimony starting in 2019. Specifically, while alimony is currently income to the recipient and deductible from the income of the payor, for agreements and judgments entered after December 31, 2018, that will no longer be the case. Put another way, the ability to shift income so that it is taxed at the rate of the tax payer at the lower tax bracket will no longer be available. As I noted, this will likely mean less after tax cash flow available to both parties under the new law (not to mention, the possibly unintended reduction on child support that may be caused since child support is calculated based upon the combined after tax incomes of the parties, i.e. the lower the net income, the lower the child support.)
Now we all know that there is no official “formula” or guidelines to calculate alimony in New Jersey. That said, we have blogged many times before on the so called “rule of thumb” that many use to get a ballpark figure for alimony, and many more use to actually settle the issue, despite that fact that it often ignores the statutory factors and economic reality. The way that this formula works is essentially this: you subtract the actual or imputed income (if unemployed or underemployed) of the recipient from the payer’s income and then take a third of the difference and call it alimony. I have heard it called the one-third rule – a third for the husband, a third for the wife and a third for the government – however the math really doesn’t work and typically the payor has more after tax income before child support is calculated. Even after child support is calculated, it was unusual to see the alimony and the kids with more than half of the net after tax income, which meant that the payor lived on half of the net income for himself and the recipient and children lived on the other half, or less. The fairness of this result can be debated on another day.
That said, because the “formula” contemplated taxes in it’s “theory”, seemingly, that formula will not be able to be used once the tax change really goes into effect. My guess is that people will look for some new formula that has the same result but there are several problems with that. With less dollars to go around, a formulaic approach that ignores actual marital lifestyle is likely to be very unfair to the recipient. Moreover, given the complexities (and quite frankly, the unknowns) of the new tax code and the fact that different business types will be taxed in different ways, to the extent that a one-size fits all formula ever worked, it cannot work now. I was at a recent seminar where a slide was shown of a doctor and a plumber with the same gross income, but a very different net income, given the difference in how their businesses are treated under the new code (not even including the perks.) And speaking of perks, things that might have been written off as business expenses but added back to income for support purposes may in many cases, no longer be deductible business expenses which could similarly reduce net cash flow available for support.
In reality, more consideration is going to be have to given to the true after tax cash flows of both parties so that fair alimony and child support results are reached. We have software that creates those calculations but I expect in the future, we will have to input many more variables to see the true after tax cash flow. I would also expect that there will be more use of forensic and tax accountants to help with these calculations so that the most fair result is arrived at.
Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric is resident in Fox Rothschild’s Morristown, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973) 994-7501, or firstname.lastname@example.org.