Board Certified Family Law Specialist Matt Arnold answers the question: “When do you get alimony?”
A recent article in the Chicago Tribune discussed the sad case of the divorce of the founder of the Cancer Treatment Centers of America. He and his wife have been embroiled in a dispute for more than eight years now and continue to fight about what share of the marital estate his wife is entitled to. The woman is asking for more than $400,000 a month in spousal maintenance, an astronomical sum to most people. One of her arguments supporting such a figure is the idea that taxes take a big bite out of what she’s already received and she needs more to comfortably pay her bills.
This question about taxes raises an interesting issue that many people may not fully understand, so let’s take a minute to explore in a bit greater detail. First, why are taxes even a concern? The reason is that the government wants to get a cut of all money that a person earns each year. Money that is being paid out for alimony/spousal support usually comes from the paying spouse’s income, meaning he or she is already paying tax on it once. The paying spouse has the opportunity to deduct these payments from his or her tax burden and frequently does so, the consequence of which is that the receiving spouse then owes taxes.
If you’re the spouse receiving the support, the money you receive is generally treated as taxable income. This means that you will need to report the money to the IRS and pay taxes on it as if it were money earned from working. One problem is that your former spouse won’t act like an employer and won’t withhold taxes from your monthly support check. This means at the end of the year you could be hit with a surprisingly large bill and not have the resources left to pay. To avoid the problem, start setting aside a share of the money each month. You may even want to pay taxes quarterly to avoid the big bill at the end of the year.
What if you’re paying support? The good news is that you’re able to deduct these payments on your income tax return and lower your overall tax liability. One word of warning is that you should be sure your spousal support isn’t tied to anything related to your children. For instance, you don’t want something that says once the kids leave home or graduate high school the support will end. The risk is that the IRS becomes aware of this and recategorizes the spousal support as child support. The problem with the recategorization is that child support is not tax deductible, meaning you could lose your ability to deduct the alimony payments.
Though this is how things usually work, it isn’t the only path forward. In some cases, you might want to agree that spousal support payments won’t be taxable and thus won’t be deductible. You might want to do this if the receiving spouse doesn’t want to report the income and be stuck with the tax liability. In other cases, the paying spouse might want to take the deduction, but instead agree to gross up the spousal support to account for taxes, meaning he or she contributes enough extra each year to cover the tax burden faced by the receiving spouse. Ultimately, it’s up to you and your spouse to decide the best way forward given your particular circumstances.
If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.
See Our Related Video from our YouTube channel:
See Our Related Blog Posts: