Alimony: What is It & How is It Calculated?

Alimony: What is It & How is It Calculated?

What Is Alimony?

If you are facing a divorce, alimony may be one of the major issues for you and your soon-to-be-ex-spouse. It can be challenging to determine how much if any alimony should be paid. Additionally, it can also be extremely challenging to determine what would be considered a fair and equitable amount of alimony.

Depending on the state in which you reside, the laws regarding alimony could be treated differently. For example, in Utah where I live, a spouse could be entitled to alimony for up to the length of the marriage. IFf they were married for 28 years, that spouse could potentially ask for up to 28 years of alimony. The real question you should ask yourself is, “should I pursue alimony for that length of time?”

For example:

Jim and Jane Doe are getting divorced. Jim has proposed that he would pay $3000 per month for up to 10 years. It’s easy to assume then, that at $3000 per month over 10 years would total $360,000. However, the total payment could be less due to a variety of factors including:

  • Death
  • Remarriage or cohabitation
  • Income changes for one or both parties

I have been in mediation appointments where they have used a very simple calculation, like in the example above, as the net present value for alimony. This is wrong. As the total payment would theoretically be made over a 10-year period, we must apply a discount calculation based on prevailing interest rates. Using current 20-year treasury rates, we can make a safe assumption that the actual net present value of this alimony payment is $326,180.

Understanding the net present value of proposed alimony payments can be useful if property division in lieu of alimony could be a viable solution.

Alimony generally is going to be based on needs versus abilities. In this aspect, there are two sides to the coin. On one side, consideration is given to a spouse’s legal need to provide support versus their ability to do so. Conversely, the spouse who is receiving alimony has the right to claim the need for support versus their ability to earn wages pursuant to their abilities.

Simultaneously, in almost every case I have worked, the spouse who is receiving alimony also has imputed income calculated as part of that calculation. This is based on their ability to seek income and to gain employment to provide for them self and be self-sustaining. In some cases, I have seen vocational specialist hired to testify to that particular spouse’s ability to earn income.

Because of these issues, it is critical that accurate financial declarations/affidavits are created to ensure you understand what if any alimony should be included as part of your divorce decree.

Last, alimony historically was a tax-deductible item for the payer and reportable income to the payee. Due to the Tax Cuts & Jobs Act, this is no longer the case for any divorce decree enforced after midnight December 31, 2018. Under current law, alimony is no longer considered to be tax-deductible nor reportable income.

In some cases, attorneys and clients hire us to make an appropriate distinction on the net present value of the alimony proposed. Defensible financial analysis can make the difference in a contested divorce. If you are facing a divorce and need financial assistance contact our office today, watch some of our informative videos or visit us at www.divorceplanningpros.com.

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