Alimony

Tax implications must be considered when contemplating the finances of a divorce. Currently, alimony is generally an “above the line” deduction for an alimony payor (the person paying) and is included as income for the payee (recipient of) alimony, subject, of course, to certain limitations (for example, the parties must file separate returns, live separately, etc.).

Changes to this law will go in effect beginning January 1, 2019, at which time alimony will no longer be tax deductible for the payor or includable as income to the payee. Alimony will work like child support, it will not be part of taxable income to the recipient, which means that the person paying cannot deduct it from his or her income. 600,000 people currently use the alimony deduction and 800,000 couples divorce each year, so the impact of this law will be widespread. It is important to note that this law is not in effect yet, and alimony payments will still be deductible for any divorces finalized prior to January 1, 2019.

Hypothetical:

Say the alimony payor makes $300,000 and is in the 25% tax bracket (we are using round/general numbers for the sake of example). Say the payor pays the ex-spouse $90,000 per year in alimony. This makes the payor’s taxable income $210,000 per year- 25% being $52,500 year in taxes. Meanwhile, the payee is paying taxes on the $90,000 being received in alimony. Under the new law, the payor would pay taxes on the full $300,000 BEFORE deducting the $90,000 in alimony- 25% being $75,000 per year in taxes.

We believe that there will be changes in the way that alimony awards are negotiated. Because the alimony payee will be receiving a post-tax award, it is likely that agreed-upon amounts will naturally be lower than what we have seen in the past, to account for the tax adjustments. It is unknown whether judges will take the tax implications of alimony into account when ordering an award, but it seems that, in the interest of equity, they would be cognizant of these changes as well.

If you are contemplating a divorce and feel that you may be paying alimony to your spouse, it may be wise to try to finish your case before the end of 2018 to be sure that you can deduct any alimony payments. If you feel you may be the recipient of alimony, some may argue it could be worthwhile to wait until after the end of 2018 to ensure a post-tax alimony payment. However, additional food for thought may be how the new law will impact the actual amounts of alimony awards, for example, in 2019, will alimony obligations trend downward? Only time will tell. Alimony reform has been a hot-button issue for many years and we forecast that more changes could be coming our way in the future. We will keep you posted!

Alimony in Florida is one of the more frequently discussed topics in family law of late as there have been several proposed legislative changes in recent years. One of the most common questions that we receive is, “will I have to pay alimony to my spouse?”

The answer to this question depends completely on the facts of your case. Florida Statute§ 61.08 tells us that the court’s determination of as to whether to award alimony to a spouse in a dissolution of marriage proceeding will depend on:

1) one spouse’s need for alimony from the other, and;

2) the other spouse’s ability to pay alimony.

In essence, does the spouse have enough money to meet his or her needs? If not, does the other spouse have enough money to financially assist that other spouse? If your case meets this criterion, the statute then states that the court must determine the type and amount of alimony to be paid. In order to reach this determination, the court will consider the following factors:

(a) The standard of living established during the marriage.

(b) The duration of the marriage.

(d) The financial resources of each party, including the nonmarital and the marital assets and liabilities distributed to each.

(e) The earning capacities, educational levels, vocational skills, and employability of the parties and, when applicable, the time necessary for either party to acquire sufficient education or training to enable such party to find appropriate employment.

(f) The contribution of each party to the marriage, including, but not limited to, services rendered in homemaking, child care, education, and career building of the other party.

(g) The responsibilities each party will have with regard to any minor children they have in common.

(h) The tax treatment and consequences to both parties of any alimony award, including the designation of all or a portion of the payment as a nontaxable, nondeductible payment.

(i) All sources of income available to either party, including income available to either party through investments of any asset held by that party.

(j) Any other factor necessary to do equity and justice between the parties.

The judge in your case obviously has a fair amount of discretion in determining the amount, type and duration of alimony. However, I am often asked for my opinion as to the appropriate amount of alimony, especially when it comes to settlement negotiations. This is a very sensitive area as it is imperative to ensure the payor client is not overpaying or that the payee client is not accepting less than s/he may be entitled. Florida Statute does not give us a formal calculation to use in calculating alimony, as with child support. However, your attorney should be able to give you advice as to a potential range that s/he would foresee the judge ordering, if you were to go to trial. This advice will help the client to come to more confidently engage in settlement negotiations if s/he wishes to avoid trial.

I cannot emphasis how important it is to have sound advice regarding alimony before signing an agreement. I have had far too many clients consult with me after they have committed to pay alimony that they cannot afford, or, conversely, have agreed to accept too little alimony. The best practice is to make sure you are in the loop on the front end of the deal. After you have signed an agreement and finalized your divorce, a petition for modification would need to be filed in order to request that the alimony amount in your case be increased or decreased. In order for the court to change your alimony award or obligation, you need to prove that there has been a substantial change in circumstances since your divorce was finalized. This is especially problematic if an individual agreed to pay more alimony than s/he could afford or to accept too little alimony, and cannot show that court that anything has changed since the divorce was finalized.

Don’t stay in the dark regarding your alimony situation. Make sure you educate yourself before making decisions with lasting legal ramifications. Call today to schedule your consultation so that we can discuss your options in regard to alimony.

WHAT YOU NEED TO KNOW ABOUT THE CHANGES TO THE TAX IMPLICATIONS OF ALIMONY

Alimony: What is the Right Amount?