On Spousal Support (a.k.a alimony) and Child Support
Often when negotiating settlements, we simply follow the child support guidelines and try to get the best deal we can through negotiation for alimony (or spousal support) payments. What we don’t think about are the ‘unspoken’ implications of receiving alimony versus child support which can be important depending on your goals.
It is important to discuss these items with an attorney and a financial advisor to ensure you are covering all of the bases for your unique situation.
NOTE: The below addresses tax law for 2018 but does not factor in changes to how alimony is treated moving forward given the new tax law.
We have created the below chart to help guide your thinking as you develop your strategy:
Spousal Support (Alimony)
|Tax Considerations||Taxable to the receiver; a tax deduction to the payer||Not taxable or deductible|
|Housing Considerations||If alimony continues >36 months post purchase, it can be counted as income on your mortgage application and lower your interest rate. If not >36 months post purchase, alimony is not considered income.||May count as income on your mortgage application depending on structure and time.|
|Timing||Can be temporarily awarded prior to divorce being finalized. Final alimony will be determined after child support as factors in gross income that is impacted by child support.||Cannot be awarded prior to divorce being finalized. Final child support will be determined before alimony.|
|Timing & Flexibility||Based on gross incomes and less structured by the court.||More constricted by the court than alimony.|
|Modification||Only able to change as stated within the separation agreement||Modifiable by the court in the case of a material change of circumstance|
Colibri Life Pro Tip:
If money is exchanged during the divorce, it is not considered taxable income for the receiver.
Knowing this could save you up to 33% in taxes on that money!
We’ve provided some examples below of how you might leverage this information.
Looking to buy a house?
Negotiate so you receive alimony for a minimum of 42 months (3.5 years). While this may mean less money each month, it gives you a buffer of time to find a home plus the required 36 months to use the alimony as income to qualify for a lower interest rate.
Trying to minimize your tax impact?
If you are making spousal support payments and are in a higher tax bracket than the person receiving, it may make sense to pay more in alimony. If the person paying is in a lower tax bracket, it might be better to transfer more in property early on than pay more in alimony later.
But be smart…the IRS may look to see if the alimony payments go down as children reach a certain age OR may watch for a drop off in alimony after a few years.