I’ll be the first one to assure you: it’s perfectly normal once you’ve signed your divorce papers to wonder if you’ll be able to live off your alimony.
What is alimony?
Alimony, also commonly known as spousal support or maintenance, is a court-ordered provision of financial support for an ex-spouse after a divorce, and in some cases, depending on various laws and factors, may be awarded temporarily during the pendency of the divorce. Although the laws surrounding alimony can vary by state, the court order will often specify the amount of alimony to be paid, as well as for when and how long the payments must be made.
Why is alimony such a perplexing topic?
Alimony is different than the division of marital property, but based on my experience with clients, alimony can feel like a perplexing topic.
In fact, these are common questions I often hear from clients who are trying to determine their financial future as a single individual:
- Now that I’m divorced, will I be able to keep up my same standard of living?
- Will this monthly amount of money be enough, so I don’t have to return to work?
- What if it’s not enough? Are there other things I can do?
I work as a Certified Financial Planning ™ (CFP™) professional and as a Certified Financial Transitionist® (CeFT®) professional, which means I’ve been trained specifically to help my clients navigate through major life changes, such as divorce, inheritance, or widowhood.
In terms of living off your alimony, here are a few things I’d encourage you to keep in mind:
1.) Determine if this money is taxed.
Taxes are a big part of most people’s budget, and if your filing status is single for the first time in years, I understand how your financial future can feel new and slightly overwhelming.
This is an area where the tax laws changed a few years ago. For many years, alimony payments were often structured so that they were included in the recipient’s income. However, this changed for new divorce or separation agreements beginning in 2019.
According to the IRS:
Beginning Jan. 1, 2019, alimony or separate maintenance payments are not deductible from the income of the payer spouse, or includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after Dec. 31, 2018.
This also applies to a divorce or separation agreement executed on or before Dec. 31, 2018, and modified after December 31, 2018, as long as the modification:
- changes the terms of the alimony or separate maintenance payments; and
- states that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
If you divorced after 2018, then you don’t need to pay taxes on your alimony.
If you have an older agreement where you will be including alimony in income, you’ll want to start by setting aside a portion of your alimony payments for taxes. This is step one, and an important one! Besides Federal income tax, you must also consider possible state income taxes. For example, if you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming, there is not a state income tax on alimony.
Let’s put the impact of paying taxes into context with two different examples:
If you and your spouse agreed on $120,000 per year in alimony, after you factor in taxes, you may be left with only $96,000+/- per year in income or only $8,000 a month after taxes—not the $10,000 a month you may have originally estimated.
If you and your spouse agreed to $300,000 per year ($25,000 per month) in alimony and you’re a single taxpayer with a 32% combined average federal and state tax rate, you may be left with only $204,000 per year ($17,000 a month) in income after taxes.
While the exact calculations will depend on your circumstances, this demonstrates the importance of considering the possible tax cost and setting aside funds to pay your taxes. It’s important to have a professional team around you who understands tax law and tax brackets as well as your personal goals and portfolio of assets. All the more reason to work alongside a CFP™ professional. You don’t want to be guessing these numbers.
2.) Consider your non-negotiable expenses.
Once you’ve set aside money to cover your taxes, you’ll want to think about non-negotiable expenses, such as housing costs, grocery bills, and auto insurance coverage, etc. Can your alimony cover these expenses? Is there money remaining? These amounts will look different for everyone, but that’s another reason why it can be helpful to work with a CFP™ professional. We can help you define a new household spending budget for the short-term and assist with your long-term financial planning success.
3.) Imagine other ways to live financially free.
Everyone defines financial freedom in terms of their own goals. “What if…” scenario planning explores opportunities to be more financial free.
Here are some “What if…” questions I often talk through with my clients who have recently gotten divorced:
- Are you interested in going back to work?
- Who has financial expectations of you?
- Do you need to make a lifestyle change to start your next chapter?
- Are there resources you can tap into, such as selling a boat, a second home, a car, jewelry, or collectibles?
- Will you have enough money to retire if you never touch the principal of your portfolio?
- Does or can your portfolio need to work harder for you?
- What impact does inflation have on your portfolio returns?
4.) Be aware of ways your future alimony income might be impacted.
There are a few considerations that could impact your future alimony income. Become informed about the rules that could reduce or remove the alimony income you are counting on going forward. Examples may include: marrying again, possible cohabitation with a new partner (rules vary by state), and/or a significant change of circumstances for the payer spouse.
Final Thoughts
Transitions require empathy from your financial team. Trust the Hadary Team at Moneta Group to deliver comprehensive and objective financial planning services. As a fee-only and independent firm, we are not swayed by external private equity or shareholders and earn no commissions on the products we recommend.
Our clients rest assured that we observe a fiduciary duty to always put their needs above our interests.
Contact the Hadary Team to learn more about our financial planning services and other specialties working with high-net-worth clients.
Sources: https://www.irs.gov/forms-pubs/clarification-changes-to-deduction-for-certain-alimony-payments-effective-in-2019
© 2022 Moneta Group Investment Advisors, LLC is an SEC registered investment advisor and wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax, or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.
