No two divorcing couples have identical circumstances, but one potential source of income (or expense) for many divorcing people will be spousal support – sometimes known as alimony or maintenance. The standard is to give support to the spouse who needs it in order to keep the family on an equal setting – however, there is an underlying duty for each spouse to work towards being independent of each other.
Sometimes known as alimony, spousal support has been treated as taxable income to the recipient and tax-deductible for the payor in the United States for the last 75 years; it is still treated this way in Canada. However, the Tax Cuts and Jobs Act (which US Congress passed on Dec. 20) scraps this deduction for anyone who signs a separation agreement or gets divorced after December 31, 2018.
Until the new tax reform bill takes effect, to get a clear picture of what you’ll be receiving or paying, you’ll need to factor in the taxes/tax deductions for the spousal support. If you’re the payor, you need to know what the actual out-of-pocket cost (the amount less tax deductions) will be to you; if you’re the recipient, you need to figure out what the net amount (the gross amount less taxes) that you’ll be receiving.
Hosted By: Diana Shepherd (CDFA®), the Editorial Director and Co-Founder of Divorce Magazine. An award-winning editor and published author, she is a nationally-recognized expert on divorce, remarriage, finance, and stepfamily issues.
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How Spousal Support and Alimony Work
Diana Shepherd: My name is Diana Shepherd, and I’m the Editorial Director of Divorce Magazine and Family Lawyer Magazine, and today I’ll be discussing how spousal support and alimony works.
One potential source of income or expense for many divorced people will be spousal support, sometimes known as alimony or maintenance. No two divorcing couples have identical circumstances. The standard is to give support to the spouse who needs it in order to keep them on an equal setting.
However, there’s an underlying duty for each spouse to work towards being financially independent of one another. Spousal support is based on a number of different factors, and it’s a very gray and subjective area. You will definitely need to speak with a family law lawyer if you think you’ll be receiving or paying support. The two most heavily weighted factors are the recipient’s need and the payor’’s ability to pay. The length of the marriage is another factor that’s considered when awarding spousal support. Unless you’ve prepared an accurate budget detailing your weekly, monthly, and annual expenses and income, you won’t know how much spousal support you’ll need or, if you’re on the other end of the equation, how much you can afford to pay.
So the first thing to do is to create an accurate budget. Aside from determining need and ability to pay, you need to understand some other important issues with regard to spousal support with respect to the amount and duration. This can either be a negotiated amount between the spouses or it can be court-ordered.
In most cases, spousal support is set up as modifiable, which means that either party can ask for it to be changed at a future date due to a substantial change in circumstances for one or both of the parties. Here’s an example of how this might work: John is paying Mary, who currently has a minimum wage job and $20,000 per year in modifiable spousal support.
In the second year after divorce, Mary finds a job that pays her $55,000 per year. Due to this change in circumstances, John may be able to have the spousal support he pays reduced. Spousal support is typically treated as taxable income to the person receiving it and tax deductible for the person paying it. This means you need to know what the actual out of pocket costs is to you if you’re going to be paying, or the net amount that you receive if you’re going to be receiving it.
For example, if your spouse is claiming that he or she can’t afford to pay you $50,000 per year, do you know how much less than $50,000 is going to really cost him or her after taxes are factored in, and if you’re receiving $50,000 per year, do you know how much of that you get to keep? Do you think that would make a difference when you’re negotiating this with your lawyer? Of course it would. Ask your financial professional to factor in the tax situation of both parties, including itemized deductions, tax filing, status, earned income credits, etc. to determine the true cost of spousal support.
The last point I wanted to make with regard to spousal support is how to protect it. If you’re relying on spousal support to cover your cash flow needs, it’s very important to protect in case your ex spouse dies or becomes disabled.
Let’s say for example, that your ex spouse dies only one year after your divorce and you were counting on support of $30,000 per year for the next five years in order to meet your needs. Where is that income going to come from? Many divorce agreements require insurance to protect support payments against death, but almost none include disability protection.
Considering that the probability of a disability occurring during one’s working years is two to three times greater than the risk of death, this is crucial insurance to obtain. A company called Family ValueGuard offers this type of disability insurance. You need to make sure that your support is protected against both disability and death of the payor, and that is protected for the correct amount.
To learn more about spousal support, go to www.divorcemag.com/alimony-spousal-support.