Someone in the 28% federal tax bracket, every $100 in alimony paid “costs” only $72 because of the tax savings. If the recipient is in the 15% tax bracket, each $100 received means only $85 is truly realized because of the taxes owed. As you can see, there’s a gap of $13 which is the IRS’s way of helping divorcing couples make ends meet. By utilizing alimony effectively, the couple saves $13 in taxes for every $100. Many state tax laws also provide for alimony deductions on top of the federal deductions. If your and your spouse’s incomes are unequal alimony may help you both save money, so explore the tax ramifications of an alimony order, both individually and as a couple. Alimony can help keep money in your collective pockets rather than in the hands of the IRS. As much as spouses dislike giving alimony to each other, giving it to the IRS is even less popular!
If you have children, and paying alimony in addition to child support is a possibility, the IRS has another vehicle by which you may take advantage of tax provisions called “Unallocated Alimony and Support,” which is a special combination of alimony and child support — all of which is deductible by the paying spouse and taxable as income to the receiving spouse. If your incomes are very disparate; for example, if one of you stays home with the children and does not earn an income, then this option may make most sense for you.
Courts have also modernized alimony in creating “rehabilitative alimony” or limited term alimony. Rather than have alimony continue for the rest of one’s life, as was typical 20 years ago, courts nowadays are considering orders which last for a specific period of time and then terminate. For example, in the case of a woman who has taken time off from her career as a teacher to raise 2 children, now ages 3 and 5, the court might award alimony for four years. During that 4 year time period, the woman has an opportunity to renew her teaching license, look for a job, and establish the children in school. By the time the 4 years pass, she should be in a much better position to support herself, without further need for alimony. Without a reasonable reprieve (in this example, 4 years), she may be unable to find a job immediately because her teaching license or education is out of date, she might be unable to find reasonably priced daycare for the children, and the children would be forced to adapt to a sudden change of living circumstances. Even a few years of modest alimony helps this situation immensely.
On the other hand, there are also traditional cases in which women who have made their lives as housewives find themselves 30 years later without a pension, 401K, or even a job. Many of these women married in college, or before college, and never finished their education. Some have never worked outside of the home, and find themselves for the first time without financial support. Because of their family work and skills, their husbands were able to further their careers without having to worry about keeping house or daily arrangements for the children. At age 55, finding a first job is extremely difficult. Alimony in this type of a scenario is more likely to be ordered for an indefinite period. For some terrific resources on divorce and money, see http://financialplan.about.com/od/divorceandmoney/Divorce_and_Money.htm. Also see the Peace Talks website’s financial information at http://www.peace-talks.com/finformation.php.
Excerpted from Your Divorce Advisor: A Lawyer and a Psychologist Guide You Through the Legal and Emotional Landscape of Divorce (Simon & Schuster/Fireside 2001). For more information: http://www.yourdivorceadvisor.com/.
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