If you are thinking about or currently going through a divorce, one of your prominent concerns may be the chance of getting stuck with a long-term alimony payment — a fear likely fanned by the Internet.
Horror stories abound on the Web of men (and sometimes women) being forced into poverty and jail due to stringent and lengthy alimony obligations that they cannot meet.
And even though that possibility does exist under the dated alimony laws of several states, it isn’t the most common scenario, so don’t let that thought keep you up all night.
Instead, you should arm yourself with knowledge regarding how alimony works, when it is usually ordered, how to go about modifying the commitment, what to do if you are unable to afford payments and most importantly, the protective language that should be included in your decree.
While state and local jurisdictions will differ when it comes to the frequency they award alimony and the length, there are several common variables that courts will use in determining if alimony is necessary. These include:
- Length of marriage — shorter marriages have a better chance of avoiding large and lengthy payments.
- Earning ability — the court will look at the careers, experience, etc. of each spouse to determine if there is a large disparity.
- Standard of living — the court will try to maintain an equivalent stand of living that was established during the marriage.
- Role in the marriage — if the husband works and supports the wife attends while she pursues an education for a more lucrative career, it can be taken into account whether alimony is necessary. Similarly, if the wife becomes a stay-at-home mom to raise the children and is out of the workforce for 10 years, this will adversely affect her earning capacity and will also be a determining factor.
- Any other relevant information — the court has broad discretion to look at anything they consider applicable. This can include asset division, additional income, educational backgrounds, tax penalties or anything under the sun they consider pertinent.
Types of alimony
There are three kinds of alimony that are typically awarded when going through a divorce:
- Temporary alimony (alimony pendente lite) — temporary payments are usually awarded during the divorce process. These are meant to ensure that if the breadwinner of the household moves out, the other party is not left high and dry.
- Rehabilitative alimony — in shorter marriages, it is common for rehabilitative alimony to be awarded for the purpose of ensuring the lesser earning spouse is able to become self-supporting. These payments usually have a set end point, and are meant to support the former spouse while they acquire education and training for a sustainable career.
- Permanent alimony — “Permanent” is scary to read. This is what most people picture when it comes to alimony; a payment to your former spouse that only ends with death. Luckily, that is not usually the case. Most “permanent” alimony requirements have stipulations that allow for payments to end, such as remarriage of the recipient or the payor reaching retirement. However, be aware that some states still can requirement an indefinite payment.
If your state allows for the modification or termination of alimony payments, you will usually have to prove to court that there has been a significant change in circumstances.
Make sure you clearly spell out in your decree reasons for such a change, such as involuntary job loss, the recipient spouse cohabiting or remarrying, a significant increase in the recipient spouse’s income, etc.
Be aware, however, that states will vary on what they consider a strong enough factor to warrant modification.
For example, Colorado doesn’t recognize job loss as a “continuing circumstance” that merits modification. If you have proven you can earn X amount at some point, you are stuck with that assessment.
Taxability of alimony
The one advantage of alimony over other payments (like child support) is that alimony is tax deductible by the payor and must be reported as income by the recipient.
Additionally, it is considered an above-the-line deduction, so you are able to subtract it from your gross income before you reach your AGI.
However, the IRS has very specific standards of what is considered alimony and what is not.
Table 18-1.Alimony Requirements (Instruments Executed After 1984)
|Payments ARE alimony if all of the following are true:||Payments are NOT alimony if any of the following are true:|
|Payments are required by a divorce or separation instrument.||Payments are not required by a divorce or separation instrument.|
|Payer and recipient spouse do not file a joint return with each other.||Payer and recipient spouse file a joint return with each other.|
|Payment is in cash (including checks or money orders).||Payment is:
Not in cash,
A noncash property settlement,
Spouse’s part of community income, or
To keep up the payer’s property.
|Payment is not designated in the instrument as not alimony.||Payment is designated in the instrument as not alimony.|
|Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household.||Spouses legally separated under a decree of divorce or separate maintenance are members of the same household.|
|Payments are not required after death of the recipient spouse.||Payments are required after death of the recipient spouse.|
|Payment is not treated as child support.||Payment is treated as child support.|
|These payments are deductible by the payer and includible in income by the recipient.||These payments are neither deductible by the payer nor includible in income by the recipient.|
Additionally, you must beware of the three-year recapture rule, which can require you to claim all of your previous deductions within that period. This also means the payee is entitled to reduce from income the alimony payments she previously received.
The rule applies when the payments decrease or terminate during the first three calendars years post-divorce, and
- The total payments made in the third year decrease by $15,000 or more from the payments made in the second year, or
- The payments made in the second year and third years are substantially less than the payments made in the first year.
Even reasons beyond your control can cause the reduction, like a modification of the decree, failure to make timely payments, inability to make payments and a modification in the amount you pay because your ex no longer needs as much from you.
Protective language to include in your decree
- How long payments are to be made? — Make sure you avoid front loading issues that would result in a tax recapture.
- How is the support figure calculated? — For example, the incomes of both parties.
- What, if anything, is to happen for the payee to become self-supporting? — Be sure to add language that would help you fight continuing payments.
- What factors will end payments? — Situations like remarriage or a marital-like relationship are commonly included.
- What happens upon retirement? — Are you still expected to continue paying when you are living off your pension or savings?
- Identify whether the payments are modifiable — if they are, specify the method for modification in various situations, like the payor losing their job through no fault of their own or the recipient increasing their earnings.
- Methods for exchanging financial information each year — you will want to verify incomes to see if you qualify for modification under the terms of your decree.
- Methods for exchanging the exact number that each person is claiming on taxes — some states go through a system for paying support and there can be a delay, so one person might claim a different amount paid than the other claims they received on taxes. The parties should confer each year so they both report the same amount and avoid an audit.
- Define alimony in the decree — if you are paying it and want to ensure it is tax deductible, recite federal tax code IRC 71 directly in your decree and indicate that both parties acknowledge their understanding of the tax implications.
Alimony is often inevitable after a divorce, and it can be a major burden for years following the separation. There may be no way to prevent the obligation, but building certain protections into your decree can at least afford you a little security and potential outs in various situations.
When alimony is an issue, you definitely ensure you have an attorney to help negotiate the stipulations and apply the proper language in your decree. Otherwise, you could risk becoming another of those horror stories, trapped in a system with no way out.