Single Payment Calculator Results
In the single payment calculator, the top line, the non-tax payment, is typically smaller than either of the next two lines.
This is because a higher amount is needed to offset the tax effects.
The following example will help to explain.
Let's say Bob wants to find the single payment that
is the after-tax equivalent to each party of 24 monthly payments of $200 each. Let's suppose that the interest rate is 5.2% per
year, that Bob's top marginal federal rate is 28%, that Carol's is 18%, and that both of their state
tax rates are 3.0%.
On the single payment calculator, the first line shows that the single payment
amount is $4,549. This has the same value as if Bob paid and Carol received 24 monthly
property settlement payments of $200 each.
These payments have no tax effect. (Child support payments also have no tax effect.) They
are not deductible to the payer, and they do not represent taxable income to the recipient.
Now, what if the payment were charaterized as alimony? Alimony is deductible to the payer and
taxable to the recipient.
The calculator shows, on the second line, that Bob would have to pay $6,593 of alimony to equal $4,549
of property settlement or child support payment. Why? Because after
Bob deducts $6,593 at a marginal tax rate of 31% (28% + 3%), he gets a tax saving of 31% of his payment. This
tax saving, 31% of $6,593, is $2,044. And $6,593 is the number which, when you subtract $2,044, the 31% tax
savings, gives you $4,549 -- the property settlement payment.
Whether Bob pays $6,593 in alimony or $4,549 in property settlement, he ends up $4,549 poorer after tax. So to
Bob, these two options are financially equivalent.
How about Carol? The third line of the calculator shows that Carol has to receive $5,759 of alimony to
be financially equivalent, on an after-tax basis, to receiving $4,549 labeled as property settlement.
Why is that? Because Carol pays tax at a rate of 18% (15% + 3%). This
works out to 18% of $5,548, or about $999. Take the $999 of tax away from the $5,548 payment, and you get
$4,549. So Carol has the same after-tax gain receiving $5,548 of taxable alimony as she does receiving $4,549
of non-taxable property settlement.
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