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Understanding Alimony

It is a common misconception that it is easy to calculate alimony in a divorce case. After all, child support is calculated by a formula. Doesn’t alimony? Actually, not, except for a handful of states that do have a formula. (The states that have formulas include California, Colorado, Illinois, New York, and Pennsylvania.) And even those states that have formulas for alimony also offer deviation alternatives, complicating the final sum.  

In all the other states, alimony is negotiated between the parties.

What is Alimony? 

According to the Internal Revenue Service, alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. Alimony is also known as spousal support, spousal maintenance, o simply maintenance. Ultimately, they all describe a payment from one spouse to another spouse or former spouse due to legal separation.  

Tax Treatment of Alimony 

Prior to the Tax Cuts and Jobs Act of 2017 (TCJA) alimony payments were deductible by the payor and taxable to the recipient. Alimony can no longer be deducted under a separation agreement if the agreement was executed after 2018. Most states now follow the federal rule and make alimony not deductible and not taxable. In a few states, alimony payments remain deductible by the payor and taxable to the recipient for state tax purposes. Where this is the case, it affects the negotiations for alimony. 

Methods to Calculate Alimony 

Family Law Software has several built-in automatic tools to make the calculation of alimony simple and the result reasonable.

First, if your state has a statutory alimony guideline, the program automatically calculates that payment along with corresponding child support (or not – you can select whether to automatically calculate guidelines).

If the guideline formula also specifies alimony duration, which most do, Family Law Software also calculates the duration. 

FLS also automatically calculates the present value of that alimony amount and duration, including any relevant state tax consequences or benefits. This is the amount the payer would pay in a lump sum, equivalent to the value of all the anticipated alimony payments. In calculating this lump sum, Family Law Software adjusts for interest and, if applicable, state taxes.

There are also two other methods to analyze alimony options in the program: alimony needed to split combined after-tax income, and alimony needed to enable recipient to cover expenses.

Calculate Alimony as a Split of Combined After Tax Income 

Family Law Software helps users find a fair and sensible amount of alimony for a desired share of their combined after-tax income for each party. 

Imagine all income after taxes being put into a pot. FLS will calculate the amount of alimony such that, after child support, taxes, and alimony, each person will have half the pot. Or the pot can be divided in any percentage you specify: 60/40, 75/25, etc.

This tool is particularly helpful for long-term marriages, where an equitable resolution is often times an even division of after-tax cash flow and assets. Instantly see alimony after entering any percentage of after-tax cash flow you desire to allocate to either party. FLS also shows what each party’s bottom line would be under each scenario.

Calculate Alimony to Meet the Recipient’s Needs 

Another approach is to forget about allocating income between the parties and just to focus on the recipient. This approach makes most sense where the payor’s financial situation is much better than the recipient’s, and where the payor will be fine with any reasonable alimony award. So the thing is to make sure that the alimony is sufficient to enable the recipient to meet their needs.

In some states alimony is intended to maintain the same standard of living the spouse was accustomed to during the marriage. Meeting the recipient’s needs or desired budget can be a mathematical challenge, but we have a solution. In Family Law Software you simply use the information from the support recipient of how much they need to meet household expenses, leisure activities, and any other necessities. Family Law Software will then calculate the spousal support necessary to meet that budget — after taxes!  

Want to see this all in action? Check out our webinar on Alimony here: https://www.youtube.com/watch?v=1Xb4MYo1VAk&t=1146s 

Helpful Resources:  

Family Law Software Power Webinar Alimony: https://www.youtube.com/watch?v=1Xb4MYo1VAk&t=1146s 

Internal Revenue Service: Topic No. 452 Alimony and Separate Maintenance: 

https://www.irs.gov/taxtopics/tc452#:~:text=Tax%20Treatment%20of%20Alimony%20and%20Separate%20Maintenance&text=Certain%20alimony%20or%20separate%20maintenance,taxable%20alimony%20or%20separate%20maintenance

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