Whether you are the spouse who will pay alimony, or you are the spouse who will receive payments, if spousal support is on the table in your divorce, you may be wondering how to make sure you get the fairest deal possible. Even with new New Jersey alimony reform laws in effect since last year, calculating alimony is still open to interpretation and, in many cases, negotiation. If you and your soon-to-be former spouse are attempting to come to your own terms in your divorce (rather than go to court), here are three tips for negotiating an alimony settlement that strikes a balance.
Consider Your Marital Assets: For many couples, the family home is the largest marital asset that requires division and distribution in a divorce. In terms of alimony amounts, the house can be used as an important bargaining chip when negotiating spousal support, especially in cases where the equity in the home will be split roughly 50-50 between spouses.
If you are the higher earning spouse who will pay alimony, one negotiation strategy might be to offer your percent of home equity to the other spouse in lieu of any alimony payments, or for a lowered alimony amount. For example, if the total amount of alimony you would pay over the support term (5 years, 10 years, etc.) works out to $50,000 and you offer $30,000 in home equity to cover part of it, payments could be reduced to reflect this.
If you are the spouse who will receive support, is being “bought out” by your spouse and staying in the family home important to you, or is selling the house and splitting the proceeds more practical? It might seem like a windfall to have your ex-spouse offer up their share of home equity, but remember, it’s just that — equity — not liquid cash. If your house requires a great deal of upkeep or is in need of repair, take these kinds of costs into consideration first before making any kind of decision. Depending on your situation, a monthly maintenance stipend may make more financial sense.
Review New Jersey Alimony Reform Laws: In the fall of 2014, New Jersey instituted a sweeping number of alimony reform laws. As you read about alimony in New Jersey, check the dates of information carefully to make sure you are using the current set of rules. For example, under NJ alimony reform, when a marriage lasts fewer than 20 years, the length of alimony payments now cannot exceed the length of the marriage unless a judge decides there are “exceptional circumstances.” In other words, if a marriage lasted for 10 years, alimony would be required — at most — for 10 years, in most cases. Other alimony factors may also be considered. What does this mean for you?
– If you are the paying spouse, and had a relatively brief marriage, the length of time you will be responsible for alimony could be minimal. Negotiating other assets to cover alimony may be even more within reach given the shorter duration and thus lower total amount of support to be paid.
– If you are the receiving spouse, be prepared that alimony payments may be minimal or may not even be awarded at all, given a brief marriage and other factors. In these cases, it may be beneficial to focus attention on negotiating other assets rather than spend considerable time and energy on alimony. For more on alimony options that may be available to you, see “Types of NJ Alimony.”
Consider Your Taxes: In general, alimony payments are deductible at tax time for the paying spouse and taxable for the receiving spouse, who is obligated to report spousal support payments as income.
– If you are the paying spouse, be aware that the IRS may scrutinize alimony payments to make sure the money is indeed going towards spousal maintenance, especially during the first few years post-divorce — a time when some individuals may attempt to write-off non-alimony divorce costs under the guise of spousal support. This is one important reason why when you negotiate your spousal support agreement, avoid tying the termination of spousal support to anything related to your kids. For example, avoid settlement terms that call for alimony to end when your children leave home or when they finish college. When settlement language reads like this, the IRS could consider the payments child support rather than spousal support—and child support payments aren’t tax deductible. For more on taxes and alimony, see “Four Tips For Filing Your Taxes When You’re Divorcing.”
– If you are the supported spouse, take some time during negotiations to roleplay your taxes and see how support payments will affect your tax bracket and taxes due. There might be other aspects of your divorce, including home mortgage payments or property taxes, if applicable, that may offset the tax due on alimony “income.” Depending on your tax bracket, you may want to swap some percentage of alimony for non-taxable alternatives, such as the paying spouse contributing to home upkeep instead. When in doubt, it may be worth it to make an appointment with a divorce financial planner who can walk you through different tax scenarios. Use this information in helping you chose the best alimony settlement option for you.
What questions do you have about alimony negotiations? Are you divorced and concerned about making changes to a spousal support plan already in place? To discuss your concerns, please contact us to schedule your initial consultation.