Divorce is state specific unless the Feds want some of your marital money. And they do. Today, alimony (aka spousal support or maintenance) is deductible dollar-for-dollar on the front page of the 1040 for the person who pays and taxable to the person who receives it a few lines higher on the same page. The House of Representatives tax reform bill has a provision that would eliminate this tax treatment for agreements signed after 2017. The Senate bill does not contain this provision. The change is supposedly worth over $8 billion to the federal government. Regardless of the unending needs of the government for your money, what should you consider if you find yourself racing to ratify an agreement before midnight on December 31st this year? After almost three decades of helping families figure out their financial futures in spite of divorce, we would like to see more deep thought on this very difficult conversation.
First, some current facts: a reliable number of how many women are paying alimony is hard to come by, but it is still small. And despite stories of financial windfalls by celebrities and wealthy wives, most mere mortals suffer significant financial injury post-divorce if they were the unmoneyed or non-working spouse in the marriage.
There can be a lot of resistance to paying and even accepting alimony. When there is a single breadwinner, they may go out the door before morning light and back comes a lifestyle with them in the evening without the family really understanding what they endure to bring back that bacon. At the same time, if there is a stay-at-home spouse, the family likely made the decision together (at least at the beginning), never accounting for the very real financial injury to anyone who steps out of the workforce for several years and yet may easily live to 100.
New divorce math: you must model outcomes. This is what we do every day for families. While we do our best work with estates of $5M and more (due to complexity), modeling lets both parties see the financial impact of doing one thing or another before either signs off. New way of thinking about alimony: while created to bridge the difference in earnings between spouses, can we please evaluate how personal financial planning operates for real people? If a spouse must immediately monetize or liquidate the assets from their divorce to live, the math does not allow for them to also build wealth for their old age. And let’s say it’s that wealthy household – if we’re really interested in ‘fairness’, why should one spouse have to use up their assets of live off them when the other spouse can immediately start building more wealth?
Divorce reality: whatever financial estate the marriage created, if that does not serve both parties post-divorce and one party cannot pay their bills or build enough wealth to stop working someday, then the rest of us must pick up the tab. If the resources are in the marriage, society has a vested interest in both parties sharing the resources.
If, out of spite, you create a financially stressed household, you may believe you’re getting back at your spouse. But that isn’t what happens. There can be a profound impact on your children, who they decide to marry, and how they handle money.
The tax ramifications of alimony should not overwhelm good divorce financial planning. Regardless of how Congress reconciles alimony, make sure you and your soon-to-be-ex reconcile how you will go forward financially, even while you go forward separately.
IMPORTANT: Bonnie A. Sewell, CFP®, CDFA™, AIF® is NOT AN ATTORNEY AND DOES NOT PROVIDE LEGAL ADVICE. All information he provides is financial in nature and should not be construed or relied upon as legal or tax advice. Individuals seeking legal or tax advice should solicit the counsel of competent legal professionals knowledgeable about the divorce laws in their own geographical areas or CPAs qualified to provide tax advice.
Divorce Financial Planning is a fee-only process that does not involve investment advice or securities or insurance transactions.