When it comes to post-divorce life, people more than anything want some stability. After such a tumultuous emotional time, dealing with financial struggles can be nearly overwhelming, which is why it is important to protect assets during the divorce settlement phase. Even during and after a high asset divorce, financial struggles can ensue. In addition, because of new tax hikes on high-earning individuals, people receiving periodic alimony might be getting squeezed by federal taxes a bit more now than in the past.
Spousal support, unlike child support, is taxable to the recipient and deductible to the spouse paying it. Therefore, people receiving alimony above a certain dollar threshold each year may see a little more of that support money go towards tax payments if they do not modify their divorce agreement.
Fortunately there are options to avoid this extra tax, such as re-classifying current expenses categorized as alimony to child support, which is not taxable in the same way. For people in the midst of a divorce or considering one soon, they might want to look into a single lump sum payment in lieu of alimony. This alternative has the advantage of being tax-free, but it does come with a certain level of risk if the recipient is not prepared to exercise the financial discipline to make the lump sum last for the long haul.
People calculating alimony need to consider their earning potential, their ability to enjoy the standard of living they enjoyed during the marriage for a reasonable time after the divorce, and their ability to practice the financial discipline often needed after a divorce. When it and their ability to practice the financial discipline often needed after a divorce. When it comes to property division and alimony, every situation is different, which is why having experience counsel to guide and assist a person to their desired outcome is so important.
Source: Forbes "Divorcing Women: Will The New Tax Laws Impact Your Divorce Settlement?," Jeff Landers, Feb. 20, 2013