How Does Divorce Affect Taxes in New Jersey?

• Divorce can impact your New Jersey tax status
• Tax implications on alimony and spousal support
• Tax considerations for division of property
• Are there tax implications on child support?
• Taxes and retirement accounts
• Homeownership and taxes 
• References

Divorce is likely to affect your taxes in a number of ways, including changing your filing status and, potentially, paying capital gains taxes – even if you don’t normally make significant capital gains. 

If you are selling a home as part of your divorce, you should look into the capital gains exclusions you might qualify for. Let’s take a look at what else you need to know about divorce, taxes, and living in New Jersey.

Divorce can impact your New Jersey tax status

The filing status of a person who gets a divorce (or who is legally separated from their partner) is typically single unless they can file as the head of a household or remarry by the end of the year. 

According to the IRS, a person who got a divorce can only file as a head of household if the following are true:

• Your spouse didn't live in your home for the last six months of the year.
• You paid more than half the cost of keeping up your home for the year.
• Your home was the main home of your dependent child for more than half the year.

Whether you were married and filed jointly or married and filed separately in past years, a divorce typically has a negative impact on how much you need to pay in taxes. 

Tax implications on alimony and spousal support

To understand the tax implications of alimony and spousal support, a person must understand the basics of the Tax Cuts and Jobs Act of 2017. This is a law that significantly changed many elements of the U.S. tax system, including taxes related to divorce. 

However, not everyone is affected by these new rules. As the law relates to alimony or spousal support, it grandfathers in the older rules for spouses who divorced before January 1, 2019. The tax implications of alimony and spousal support for those married before and on or after that date are different.

Prior to January 1, 2019, a person who got a divorce and was required to pay alimony could deduct those payments from their taxes. A person receiving alimony also had to report any alimony received as taxable income. 

Divorces finalized on and after January 1, 2019 work differently. Under the new rules, a person cannot deduct alimony payments from their taxes, and a person receiving alimony doesn’t need to report those payments as taxable income federally.

However, state taxes don’t necessarily work the same way federal taxes do. According to an article on exemptions and deductions from the New Jersey Division of Taxation last edited December 5, 2023, New Jersey continues to allow people to deduct from gross income court-ordered alimony or separate maintenance payments one makes. 

Suggested: How 2017’s Tax Bill Changed How Alimony Is Taxed

Tax considerations for division of property

During a divorce, community assets and debts are typically split equitably between the divorcing parties. Property transfers don’t count as a gain or loss when the transfer is between spouses or former spouses. Note, however, that this transfer has the potential to change an individual’s financial situation radically. It often means the parties end up selling expensive items that would be difficult or impossible to split, like a house, and then split the money from the sale. 

This touches on one of the harder areas of tax law: capital gains taxes. In short, profits made from selling assets you’ve held for one year or less are considered short-term capital gains and are treated as income. Profits from assets you’ve held for more than a year are typically treated as long-term capital gains. Long-term capital gains are taxed differently, with a tax rate of 0% to 20% and the potential for higher earners to be subject to an additional 3.8% net investment income tax.

Are there tax implications on child support?

While child support payments have the potential to significantly affect a person’s financial situation, there are no direct tax implications from paying or receiving child support.

Taxes and retirement accounts

Money paid into retirement accounts is treated as community property, meaning it needs to be split as part of a divorce. This can be complicated by the fact that many people also pay into these accounts before getting married and after getting married, with those payments treated as individual property. 

This means that the money coming from a retirement account often isn’t split 50/50, as individual property doesn’t need to be divided in a divorce. 

Suggested: Divide, Equalize and Offset, or Cash Out Retirement Accounts? by QDRO expert and Hello Divorce contributor Louise Nixon.

Homeownership and taxes

Because married couples who own a home are treated as one owner, the way one is taxed regarding homeownership typically changes during a divorce. 

After a divorce, New Jersey considers the parties to be 50/50 owners of a home (assuming the home isn’t sold) unless the deed states otherwise or some part of the divorce decree establishes otherwise. The deed will also typically need to be updated.

It’s also worth noting that when a primary home is sold as part of a divorce, this will qualify as a capital gain. However, significant exclusions are available at a federal and state level for such sales if the home was owned and lived in for two of the five years before the sale. In such cases, a divorcing couple may qualify to exclude up to $500,000 from the total price the home was sold for. If the couple is already divorced, they may exclude up to $250,000 of gain each on their returns.

Suggested: Things to Do before You File for Divorce in New Jersey

References