Tax Implications of a New Jersey Divorce

Financial issues are at the heart of nearly all New Jersey divorce cases. With that in mind, there are a number of tax implications associated with a New Jersey marriage dissolution proceeding that needs to be borne in mind. There are some elements of a divorce case that can have specific tax implications. These include:

• Filing status changes
• Alimony payments
• Child support payments
• Property division
• Retirement accounts
• Dependency exemptions
• Home ownership
• Legal fees
• Timing of New Jersey divorce

Once you are divorced, your filing status will change from married filing jointly or married filing separately to single or head of household. This change in status can affect your tax rate, deductions, and credits. You need to make certain that you fully understand the way this can impact your overall financial situation going forward following the end of your marriage.

Due to tax reform alimony is no longer taxable for the payee or tax deductible for the payor.

Child support payments are not tax-deductible for the payer, and they are not considered taxable income for the recipient. This means that neither the payer nor the recipient needs to report child support payments on their tax return. As an aside, the fact that child support payments are not tax deductible.

Property transfers between spouses are generally tax-free. However, if you sell the property later, you may have to pay capital gains tax on any profit you make. It's essential to keep track of the cost basis of any property you receive in the divorce settlement, as it can affect your capital gains tax liability when you sell it.

Splitting retirement accounts during the divorce process can have tax consequences. A Qualified Domestic Relations Order (QDRO) can help avoid penalties and taxes by dividing the account in a way that complies with IRS rules.

Only one parent can claim the dependency exemption for a child. The parent who has custody for the majority of the year usually claims the exemption. However, parents can agree to alternate years or divide the exemption in some other way.

If you sell your home during or after a divorce, you may be eligible for a capital gains tax exclusion of up to $250,000 or $500,000 for a married couple filing jointly. To qualify for this exclusion, you must have owned and lived in the home as your primary residence for at least two of the five years before the sale. A tax advisor can provide you more information about this issue and your potential tax liability in regard to your marital residence.

Legal fees associated with a divorce are not tax-deductible. This means that you cannot deduct any legal fees you paid for your divorce from your taxable income. As an aside, you likely will be responsible for paying your own attorney fees. In other words, it is not likely that the other party will be required to pay legal fees in your case. Only in isolated situations is a party to a divorce required to pay the other party’s attorney fees.

The timing of your divorce can impact your taxes. If you are divorced by December 31st, you will be considered unmarried for the entire year. This can affect your filing status, deductions, and credits for the entire year.

In conclusion, understanding the tax implications of your New Jersey divorce is crucial to avoiding any unwanted surprises come tax time. By working with a knowledgeable divorce attorney and a tax professional, you can better ensure that you are fully aware of the tax consequences of your divorce. You will place make informed decisions that will help you achieve your financial goals. If you have any questions about a New Jersey divorce, call (201) 845-7400 for a free consultation.