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Q: How do we know whether there will be any alimony in our case? A: Typically, the alimony amount, if any, is determined in a negotiation between the two of you. If you can't agree, then a judge will decide, based on the law of your state. Because the prospect of the judge is always standing in the background, the parties often end up with approximately the same result they think a judge might give. Q: How does the judge decide? A: Each state's law specifies a set of factors for a judge to consider in granting alimony. Although these factors vary from state to state, they typically include the following:
Q: What is the difference for income tax purposes between alimony and child support? A: Alimony is deductible by the payer. It has to be included in the taxable income of the recipient. Child support, on the other hand, is not deductible by the payer, and it is not included in the taxable income of the recipient. Payers usually prefer to categorize payments as alimony, because they get a tax deduction. And, often, the tax benefit to the payer outweighs the tax cost to the recipient. In these cases, the parties can increase the alimony payment just enough to compensate the recipient's tax cost, and have the payer still come out ahead. Q: So aren't we better off just making all the payments alimony (instead of child support) and getting the tax benefit? A: Not always. First of all, sometimes the recipient and payer are in the same tax bracket. Then there's no overall benefit. Second, there are legal requirements that must be met in order for alimony to be tax deductible. And meeting those requirements might not be best for the family. Q: What are the requirements for a payment to be considered tax-deductible alimony? A: In order for alimony payments to be tax-deductible, all of the following must apply:
And, for example, the family may prefer that payments continue past a child's 18th birthday. Or they may want them to continue even if the recipient spouse dies. Also, a minimum amount labeled as "child support" is typically required by the state. Some states, however, expressly allow the parties negotiate to label the payments as alimony. In these cases, the payments must still satisfy the federal requirements for alimony, above. Q: Can alimony be structured as a percent of the payer's income? A: It would sometimes make sense to structure alimony as a percent of the payer's gross income, or income after expenses. The trick is figuring out what this number is. Q: We are thinking about negotiating a larger property settlement instead of paying alimony. Can we do that? A: Sure. In fact, it's a pretty common trade-off. Q: We are thinking of characterizing our property settlement as alimony, in order to make the payments tax deductible. Can we do that? A: Yes again. But you have to be careful about a set of IRS rules known as "alimony recapture." They could apply if any year's alimony payment is more than $15,000 and the payments decline year-to-year in the first three years. The recapture rules recharacterize as "property settlement" part of an alimony payment that declines by more than $15,000 from the first year to the second-and-third years. The recapture rules similarly recharacterize as "property settlement" any part of an alimony payment that declines from the second year to the third year by more than $15,000. Q: I want to transfer $25,000 of property, but label it as alimony. How much per month should I pay, if I want the payments to last five years? A: If you expect an interest rate of 5%, you should pay $472 per month, before considering tax effects. If the payments are deductible, and you are in the 28% bracket, you could pay $655 per month and have the same after-tax cost as $472 per month of non-deductible payments. If your spouse is in the 15% bracket, your spouse only needs to receive $575 per month to compensate for the additional tax cost. This means that, for any monthly payment in the $575 to $655 range, you both come out ahead by labeling the payments as alimony, as opposed to, say, property settlement payments. If you split the difference, and make a $615 monthly payment, the payer saves about $350 a year, after taxes, by characterizing the payments as alimony. The recipient also comes out ahead -- by about $600, by characterizing the payments as alimony. Clearly, this is a win-win situation. Q: Can Family Law Software help? A: Certainly. For one thing, the calculation about alimony and property settlement payments made above was done with the Family Law Software "Alimony vs Property Settlement Calculator." And this calculator is just one of the valuable tools in the Family Law Software "Divorce Calculators." The Family Law Software "Financial Planner" can also help, by letting you enter a detailed financial plan, then vary the alimony payment and see the effect on both your and your spouse's after-tax bottom lines. The Financial Planner will also let you say, "If we make the alimony payment be 2% of gross income, versus 5% of income after expenses, which is better for me, and how much?" The Financial Planner also contains a wealth of additional information about the deductibility of alimony and alimony recapture. (It can do alimony recapture calculations automatically.) Back to main Finance Page | |||||||||||||||||||||||||
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