Alimony - Spousal Support
Alimony is the amount of money one spouse pays to the other, by court order, for support and maintenance.
In recent years, alimony, due to the negative connotations, has been referred to as maintenance or spousal support. Traditionally, alimony was awarded to the wife and paid by the husband. However, during the 1970's and 1980's judges began to award alimony to the husband depending upon the circumstances. Alimony is awarded to either spouse in an effort to maintain the standard of living that both parties were accustomed to during the marriage.
Alimony awarded prior to the divorce is called pendente lite alimony. It is taxable income to the recipient and tax deductible to the payor. See below for more in depth tax issues related to alimony.
At the time of the divorce if alimony is awarded it can be one or a combination of the following:
- Permanent: This type of alimony is to be paid until either the death of the pay or of the remarriage of the recipient. Some agreements may include a "cohabitation" clause that states alimony ends when the recipient cohabits with another person in the avoidance of marriage.
- Lump sum: This type of alimony is one payment of alimony instead of periodic (usually weekly or monthly) payments. Lump sum alimony just like all other alimony is taxable, so be sure to consult with a CPA experienced in divorce to determine the tax consequences of this type of payment prior to agreeing to it.
- Temporary: This type of alimony lasts for a specific period of time, usually one to two years. This type of alimony may be awarded when the persons involved are on almost equal ground but due to certain circumstances, one person may need financial assistance in order to "get on their feet."
- Rehabilitative: This type of alimony is the most commonly awarded alimony. It is awarded in a situation where the recipient is younger, or able to eventually enter or return to the work force and become financially self-supporting. Rehabilitative alimony may include payments for the education necessary to enable the recipient to become self-supporting.
Keep in mind that if you are awarded any type of alimony it will cease upon death of the pay or. It is a good idea to include a life and disability insurance policies in an amount sufficient to replace the alimony. Because you have an insurable interest in the person being insured, you are able to buy the policy yourself. This could be money well spent in the event that life and disability insurance are not part of your agreement. Every state has its own criteria for determining the need and extent of alimony. However, generally the following factors may be considered:
- Duration of the marriage.
- Earning capacity of both parties.
- Age, as well as physical, mental, and emotional state of each party.
- Other income, including but not limited to interest and dividends.
- The contribution by one spouse to education and furtherance of career of the other.
- The contribution of one spouse as a homemaker.
- How much earning power will be affected by the parenting requirements of the custodial parent.
In addition to the above, the judge may consider ANY economic circumstances of either party that they (the judge) deem to be just or proper.
The amount of alimony payments is generally calculated based on the above considerations. As with any other aspect of your divorce, if possible it is always best to negotiate alimony rather than have a judge arbitrarily determine if your situation is one that will include alimony and how much will be awarded.
Every state has different statutes regarding the award of alimony. Therefore, it is imperative that you consult an attorney that specializes in divorce before making any decisions regarding alimony.
Alimony and Taxes
You should be aware of the Recapture rule for alimony. It can get complicated so consult a tax accountant if you think you are impacted as either a payor or a recipient of alimony.
IRS Publication 504 states the following about the Recapture of alimony:
If your alimony payments decrease or terminate during the first 3 calendar years, you may be subject to the recapture rule. If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. Your spouse can deduct in the third year part of the alimony payments he or she previously included in income.
The 3-year period starts with the first calendar year you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a written separation agreement. Do not include any time in which payments were being made under temporary support orders. The second and third years are the next 2 calendar years, whether or not payments are made during those years.
The reasons for a reduction or termination of alimony payments that can require a recapture include:
- A change in your divorce or separation instrument,
- A failure to make timely payments,
- A reduction in your ability to provide support, or
- A reduction in your spouse's support needs.
When to apply the recapture rule.
You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year. When you figure a decrease in alimony, do not include the following amounts:
- Payments made under a temporary support order.
- Payments required over a period of at least 3 calendar years that vary because they are a fixed part of your income from a business or property, or from compensation for employment or self-employment.
- Payments that decrease because of the death of either spouse or the remarriage of the spouse receiving the payments before the end of the third year.
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