What is alimony, and how does it work?

What is alimony, and how does it work?
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#1

What is alimony, and how does it work?


#2

Alimony is spousal support that is a legal obligation to provide financial support to his or her spouse after a divorce. It is typically issued by a divorce decree according to each state's divorce law. It's important to distinguish alimony from child support they are two different things and especially where taxes are concerned.

Alimony is not child support, where after divorce one parent is required to contribute for the support of their children by paying money to the child's other parent. Alimony is treated as taxable income to the receiving spouse and is deducted from the income of the paying spouse. Child support payments are neither deductible to the paying spouse nor is it taxable to the receiving spouse, it is simply paid and no tax concerns coming to play.


#3

Alimony is most commonly referred to as spousal support these days.  It is an amount paid from one person to their ex-spouse after a divorce, as directed by the family courts.  In some states, such as California, spousal support is paid for a period of time equal to about ½ of the length of marriage if married less than 10 years.  For a marriage over 10 years, spousal support can be permanent.

In a mediated divorce, the two people can agree on an amount, duration and structure of spousal support.  There are several ways to calculate an amount, either based on actual living expenses or based on income.  If using actual living expenses, a “marital standard of living” is calculated by a CPA.  If using income, most professionals will use a software package called “Dissomaster.”  In a mediated divorce, any of these numbers calculated can be used as guidelines.  If mediation fails or the divorce goes to family court from the start, the judge will likely use Dissomaster to calculate the spousal support amount.

Spousal support is a tax-deductible payment.  It is deducted from gross income to arrive at adjusted gross income.  This is in contrast to child support payments, which are not tax deductible.  In some states, you may be able to combine child support and spousal support into a combined amount which is fully tax-deductible, but the rules are very strict on how to do this.

Gary E.D. Alt, AIF®, CFP®

www.MontereyPrivateWealth.com




#4


In my experience (23 years working with divorcing couples) it is a double edged sword.  The reality of paying and receiving alimony is often different from the perception of outsiders.  I grew up in a household where my father (who left when I was 9) did not live up to his financial obligations and I am now married to a wonderful man who meets his financial obligations of support but it is devastating to his financial position.  Alimony can be a lifeline and I believe that is its highest use.  For a bridge to the future for someone who for whatever reasons did not create a viable future for themselves. 

It hopefully is the rare young person that anticipates a work free life in America. Alimony can be a bridge to a productive work life (at almost any age).   Alimony can also be a noose in that if it is permanent, you can never marry again for fear of losing this payment.  When temporary, you can build a foundation and both parties can move on with their lives. 

In several states, including Virginia where I live (FL, NJ, and a few others are notoriously punitive) alimony is indeed punitive and very, very random.  Think about any other major financial obligation that has no legal formula for determining an appropriate amount.

This topic is a very emotional one for both the payer and recipient but in a nutshell, it's critical to improve our current system.  Alimony (spousal support) is an important tool in creating a fair settlement.  In my experience, it is often mis-used to punish and reward.  We're better than the system we use today.


#5

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