Calculating Alimony Pursuant to NJ Alimony Laws

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Pursuant to NJ Alimony Laws, how is alimony in NJ determined?  

Are there NJ Alimony guidelines like there are NJ child support guidelines?

No.

Here's the short answer, the bottom line:

As of my updating this article on July 22, 2019, my experience since the tax laws changed on January 1, 2019 has been that when calculating alimony in NJ for divorce settlement purposes, many mediators and NJ divorce lawyers are accepting the theory that it is logical to begin their analysis by taking 25% to 26% of the difference between the higher earner's income and the lower earner's income.

They then are often recommending that to settle the alimony issue, that amount, perhaps raised a little for longer marriages and perhaps reduced a little for shorter marriages, should be provided to the lower earning income spouse.

That alimony is taxable to the higher income spouse. The lower earner pays no tax on the alimony as of January 1, 2019.

It is crucial that you understand that this "formula" is NOT what NJ alimony law mandates, and it is NOT what judges do when they decide alimony if you should go to trial.

Rather, it is simply an artificial way that many of those who try to recommend fair settlements are tending to suggest resolution of the amount of alimony without the necessity of applying a rather detailed and somewhat convoluted law.

In terms of how long alimony should be paid, for marriages of up to 10 years or so, people are often agreeing to 1/2 of the length of the marriage (but again, if the matter actually goes to a trial, judges are bound by the law, which says that for marriages of less than 20 years, normally a judge can order alimony for any length of time up to the length of the marriage.)

That's the short explanation.

Here's the longer answer, the reasons...

Whether you are paying or receiving alimony, to make sure that you get the best alimony deal possible given your particular situation, you need to understand that the way that alimony in New Jersey is supposed to be calculated is often very different from the way that it actually is calculated.  

After understanding that distinction, you will be equipped with the information necessary to allow you to make an informed decision as to how alimony should be calculated in your NJ divorce case.

Then you need to understand that because of the new federal tax laws regarding how alimony is taxed that went into effect on Jan. 1, 2019, the way that alimony actually had been calculated for decades in most cases that settled without going to trial is no longer mathematically justifiable.

Let me try to explain.

Up until January 1, 2019, the way that alimony had actually been calculated in most settled cases is what is informally referred to as "the one-third rule."

This was in stark contrast to the way that our New Jersey alimony statute says that the alimony law is supposed to be calculated.

The way that the New Jersey alimony law is supposed to work is that a judge is supposed to consider the statutory factors and apply the facts of the particular case to the listed statutory factors.

Then the judge is supposed to determine what a fair and reasonable amount of alimony under the facts of that particular case would be.

That sounds like an awful lot of work, doesn't it? 

How does a judge even really do it?

Well, indeed, it is an awful lot of work.

It also leaves quite a bit of room for the judge to exercise discretion.

Judge's usually start by examining each party's Case Information Statement (ie, their budget and list of assets and liabilities.)

They then have to analyse each Case Information Statement carefully and "adjust" the entries put down by the parties to reflect the economic reality that since these people are separated or separating, they will now need two houses with two sets of expenses.

They then apply the economic reality test meaning two cannot usually live separately on the same budget that they were living on when living together, and so they would "tweak" each number on the respective budgets to try to find a balance that seems to be "fair."

Sometimes they get it right and both sides are reasonably happy. Sometimes they get it wrong and someone is very unhappy.

In my experience, most cases settle and therefore judges do not have to engage in the difficult task of calculating alimony pursuant to the specific statutory terms very often.

But what happens in the very large percentage of cases that settle without a trial? If we do not have a judge to listen to the testimony of the parties, consider the evidence, apply the law to the facts of the particular case, and then set alimony, how does alimony get calculated?

Well, in my experience, up until December 31, 2018, many lawyers and mediators (including me very often) used to "cop out" and use what was known as "the one-third formula."

The one third formula said that we take the difference of the income between the husband and the wife, divide that difference by 3, and "voilà! "...there was the alimony number, then tax deductible to the payor and taxable to the recipient.

 

Huh?

The one-third formula was not the law at all, and indeed, the Appellate Division of the New Jersey Court has twice stated that there is no such thing as a one-third formula but rather the alimony statute is to consulted at all times when alimony is being calculated.

Nonetheless, the simplicity of the one-third formula seemed to be too attractive to most lawyers and mediators.

Again, judges did not and could not have used the "one-third formula" when they decided cases after a trial.

Even so, I have heard more than just a few Family Court judges over the past 15 years or so refer to the 1/3 rule when counsel and the Judge were discussing settlement possibilities in the judge's private chambers.

During private settlement negotiations, some judges have said to me, 'I understand that there is no 1/3 rule. Or any other formulaic rule for that matter. BUT...

...let's just take a look at what 1/3 of the differences of their incomes looks like for starters....", and you know where the discussion would often go from there.

So the practical question for someone facing paying alimony or receiving alimony ultimately came down to, "Will it be better for me to have the statutory factors applied to the facts of my case by a judge during a lengthy and costly trial, or might I be better off by just using the rather arbitrary but widely-accepted one-third formula?"

The answer to that all-important question depended upon the specific facts of someone's situation.

More often than not, everyone ultimately agreed to use the 1/3 formula, perhaps with some adjustments upward or downward to reflect either a long or a short marriage (in terms of calculating the AMOUNT of alimony, not the number of years that it would be paid.)

If that person concluded that he would likely fare better by having the statutory terms applied to the facts of his case, then what could he have done to make sure that the statute was applied in his case?

That's easy… he could have just insisted that the statute be applied and said that he didn't care at all about even looking at 1/3 of the difference of their incomes. He could have told his lawyer to take the position that there is no 1/3 alimony rule and that he knows for a fact that the Appellate Courts have said this at least twice in recent years.

No one could have argued with him saying that applying the statute to the facts of the case was the proper way to have an alimony determination made.

If, on the other hand, after a careful review of the alimony statute and consideration as to how it would likely be affected by the particularities of his case, that person had concluded that he would have likely done better by allowing the 1/3 rule to be applied, then he could have just sat back and gone along for the ride... in all likelihood, the system would have defaulted to this theory for him.

 

The New Tax Law

But now, as of January 1, 2019, the law has changed so that alimony is now taxed to the payor, not the recipient. And no one is now saying that the 1/3 formula is ever fair.

Looked at slightly differently, assuming that it is the husband who owes the duty of paying alimony to the wife, in the "old days", the husband would pay the alimony but then write it off, while the wife would receive the alimony but first have to pay taxes on it.

Now, the husband pays the alimony but he no longer gets to write it off.

Why did the government do this?  

Because the government realized that it will collect more tax dollars this way because usually the payor of alimony is in a higher tax bracket than the recipient of alimony is.

Therefore, by taxing the payor instead of the recipient, the government gets more money and the husband and the wife have less money to divide between them.

So what does all of this do to the "1/3 rule"?

Well....some distinguished experts are now saying that 25% or 26% is the "new standard". 

What they are saying is that instead of subtracting the recipient's income from the payor's income and taking 1/3 of the difference to calculate alimony, now we still would subtract the recipient's income from the payor's income.

However, the new "rule" would have us multiply that difference in incomes by 26% as opposed to 33-1/3%, and the resulting number would be the alimony.

Let's use two examples with the same underlying facts but differing percentage rates to show the difference. In both examples:

Husband earns $100,000/year.

Wife earns $25,000/year.

 

"Old" Tax Law Example

Under the old 1/3 formula:  $100,000-$25,000= $75,000.

$75,000 divided by 3 = $25,000

Therefore, husband would pay wife alimony of $25,000 under the "old" 1/3 rule. 

Husband pays income taxes on $75,000 of gross income.

Wife pays income taxes on $50,000 of gross income (ie, her income from work of $25,000 plus her alimony income of another $25,000.)

 

"New" Tax Law Example

Under what seems to be emerging as the "new" 26% rule it looks like this:

The same $100,000 - $25,000 = $75,000.

However, now we say that 26% of $75,000 = $19,500.

Therefore under the "new" rule, Husband would pay alimony of $19,500 to the wife instead of the $25,000 that he had been paying under the "old" rule.

But Husband pays tax on his entire income of $100,000, not just the $75,000 that he used to pay tax on under the "old" rule. This is unfair to the husband because he is paying more in taxes.

To "make it up" to the husband, he pays the wife a lesser amount of alimony (ie, 26% instead of 33-1/3%.)

Thus instead of paying $25,000 to the wife,  he provides the wife 26% of the difference between his $100,000 gross income and the wife's $25,000 gross income, which is $19,500.

Husband is left with $80,500 less taxes on the full $100,000.

Wife ends up with $5500 less per year at first blush...but it is not taxable to her because the Husband is paying the tax on it.

The bottom line is that they both end up with less spendable money under the "new" formula, and the government gets more in taxes.

 

Knowledge is indeed power when it comes to your divorce case.

The more you learn, the better you will be able to partner with your divorce lawyer to make certain that you obtain the best results possible.

This website contains a free "NJ Divorce Course" containing 14 lessons with a total of 85 articles, all designed to help empower you as you grapple with the issues in your divorce.

In fact, this article on Alimony comes directly from Lesson #7 of my divorce course.

If this article was helpful to you, then there is much more material where this came from that is available to you right now.

skaplanI designed this website to be a free source of helpful information for anyone who needs to understand the ins and outs of getting divorced in New Jersey.

To learn more about alimony or any other area of New Jersey divorce law, CLICK HERE to be directed to my "NJ DIVORCE COURSE."

Steven J. Kaplan, Esq.

 

 

 

 

 

 

 

Topics: Alimony, Divorce Court