Alimony – spousal support – is a flexible financial tool for divorcing couples. It offers tax advantages that can help put more cash in the pockets of both spouses.

What is it?

Alimony is also sometimes called spousal support. It’s designed to provide the lower-income spouse with money for living expenses over and above the money provided by child support. Alimony is different from child support. Where child support is a simple mathematical calculation using guidelines published by your state, alimony in most states is very much in the discretion of the judge.

Can I get it?/Will I have to pay it?

There are several factors a judge considers when deciding whether to grant alimony. These differ from state to state, of course, but they usually involve things like the parties’ relative ability to earn money, both now and in the future; their respective age and health; the length of the marriage; the kind of property involved, and the conduct of the parties. In general, about the only time a judge will award alimony in most states is where one spouse has been economically dependent on the other spouse for most of a lengthy marriage.

Why would I want to pay alimony?

Alimony gets treated differently from child support on your tax return. Alimony is tax deductible to the person who pays it, and included in the taxable income of the person who receives it. Child support, by contrast, is not taxable to the person who receives it and not tax deductible to the person who pays it. That means that when you and your spouse have dramatically different incomes, there may be some tax advantages to using alimony, even if a judge wouldn’t ordinarily award it.

John and Melanie realized early on that alimony might make sense for them. John’s income of $175,000 made every deduction precious to him. And at her $23,000 schoolteacher’s salary, Melanie had a substantially lower tax rate. What they realized after looking at the numbers was that if John could claim the support he paid as alimony, he could afford to pay Melanie more than enough to compensate her for the extra tax she would have to pay, and still come out ahead.

For couples like John and Melanie, I spend a great deal of my time as a coach helping them think through whether they could use alimony and have both the husband and the wife come out better after tax. I use software to help clients understand what their after-tax income would be using each of several scenarios. Then the two spouses can negotiate with full knowledge of the advantages and disadvantages to each of them.

Software to Think It Through

The software I use to evaluate alimony when I’m working with clients is expensive, but you and your spouse may decide that it’s worth buying it so you can think these issues through together. It’s called Divorce Planner, and you can buy it from FinPlan.

What Are the requirements?

In order to constitute alimony, there are several requirements that you have to satisfy. They’re set forth in IRC §71.

  • The payments must be in cash. Checks or money orders are acceptable – and yes, a transfer using Paypal – but not debt, property, or services.
  • The payments must be provided for in a divorce or a written agreement (no, you can’t go back eight months after you began paying informal support and call what you’ve been paying alimony – check out the sheet on trial separation for more information).
  • You can’t claim alimony during any year for which you file a joint tax return.
  • You can’t pay alimony during a time when you and your spouse live in the same residence. And carving out separate quarters in the same residence doesn’t count. Different bedrooms don’t count. Different wings don’t count. You have to live in separate dwellings under different roofs.
  • The payments have to stop when the recipient spouse dies.
  • This isn’t really a requirement, but because you can opt out of alimony treatment, there’s a logical provision that if you say it’s not alimony, it’s not alimony.

The Hurdle Tests

The tax advantages of using alimony can be so powerful that people going through divorce are tempted to label as alimony some payments that are really child support or property settlement. But Uncle Sam has already anticipated that. The government’s response is in the form of two tests:

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