Pursuant to NJ Alimony Laws, how is alimony in NJ determined? Are there NJ Alimony guidelines like there are NJ child support guidelines?
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 (ie, without going to trial), most people are taking 25% to 26% of the difference between the higher earner's income and the lower earner's income and giving that to the lower earning income spouse as alimony.
That alimony is taxable to the higher income spouse. The lower earner pays no tax on the alimony as of January 1, 2019.
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
The way that alimony had actually been calculated in most cases is what I informally refer 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, and then render a fair and equitable ruling on a supported spouse's claim to alimony.
The specific statutory factors are:
(1) The actual need of the supported spouse, and the actual ability of the other spouse to pay alimony;
(2) The length of the marriage;
(4) The standard of living established in the marriage, and the likelihood
that each party can maintain a reasonably comparable standard of living, with neither party having a greater entitlement to that standard of living than the other;
(5) The earning capacities, educational levels, vocational skills, and employability of the parties;
(6) The length of absence from the job market of the party seeking maintenance;
(7) Each parties' share of the parental responsibilities for the children of the marriage;
(8) The time and expense necessary to acquire sufficient education or training to enable
the party seeking alimony to find appropriate employment, the availability of the training and employment that she requires, and the opportunity for future acquisitions of capital assets and income;
(9) The history of the financial or non-financial contributions to the marriage by each party including contributions to the care and education of the children and interruption of personal careers or educational opportunities;
(10) The equitable distribution of property ordered and any payouts on equitable distribution, directly or indirectly, out of current income;
(11) The income available to either party through investment of any assets held by that party;
(12) The tax treatment and consequences to both parties of any alimony award;
(13) The nature, amount, and length of alimony paid during the divorce proceedings; and
(14) Any other factors which the court may deem relevant.
So what a judge is supposed to do when deciding an alimony case is listen carefully to what the husband says the facts are, listen equally carefully to what the wife says, consider the evidence, and then apply the facts as the judge truly believes them to be to all of the statutory criteria.
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?
Well, indeed, it is an awful lot of work.
It also leaves quite a bit of room for the judge to exercise discretion.
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, people in the system -- lawyers, judges, mediators -- used to "cop out" and go toward what is 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 is the alimony number.
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 even to many judges.
That is not to suggest that judges used the one-third formula when they decided cases during a trial; in my experience, they did not.
But I have seen some judges refer to the 1/3 rule when counsel and the Judge were discussing settlement in the judge's private chambers.
During private settlement negotiations in a judge's chambers, 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 case 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 one-third formula?"
The answer to that all-important question depended upon the specific facts of someone's situation.
If that person concluded that he or she would likely fare better by having the statutory terms applied to the facts of their case, then what could they have done to make sure that the statute was applied in their case?
That's easy… just insist that it be applied. They could have told their lawyer to take the position that there is no 1/3 alimony rule and that they know for a fact that the Appellate Courts have said this at least twice in recent years.
No one could have argued with that person 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 that person's case, that person had concluded that they would have likely done better by allowing the 1/3 rule to be applied, then that person could have just sat back and gone along for the ride... in all likelihood, the system would have defaulted to this theory for them.
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 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%, 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 a lesser amount.
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.
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