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October 9, 2014 Blog

Divorce Attorney to Business Owners and Executives Answers Your Questions About Business and Divorce. Part 1

I have to pay alimony to HIM?

More and more women are the top bread-winners in their family. Because of their many obligations and the imbalance of power that comes with being the primary wage earner, some husbands fall to the wayside. For example, Kim became a partner in a law firm while her husband pursued a career as a developer whose projects never quite came through or generated much profit. When Kim and her husband separated, she was indignant that she had to pay alimony to him when she had worked so hard for her position in life and viewed his career path as little more than a hobby. Men are much more accustomed to the idea of paying alimony. In my experience, it is a bitter pill for women to swallow, but is an occurrence that is becoming much more common.

What are the tax implications of alimony and child support?

Alimony is based on the accustomed standard of living during the marriage. It is often calculated using bank and credit cards statements for the past 24 months. Once the monthly expenses are calculated, the income of the financially dependent spouse is compared to the monthly expenses. Any shortfall is made up in alimony to the extent that the financially supporting spouse has the ability to pay. Alimony is taxable to the recipient and deductible to the payor. If the dependent spouse has a shortfall of $3,000 per month, that amount has to be “grossed up” for taxes so that the net is $3,000. For the payor spouse, the amount paid is an above the line tax deduction. If he or she pays $36,000 per year in alimony, that amount is not included for income tax purposes. While the annualized deduction may be beneficial, often the grossed-up number compromises cash flow on a monthly basis, at least in the first year until the deduction is realized. In some cases, parties agree that the payment of support will not be taxable to the recipient or deductible by the payor. This scenario is sometimes referred to as family support and makes more sense in cases where the same amount of money is now supporting two households. Child support is a non-taxable event; it is neither deductible to the payor nor taxable to the recipient.

Click here to read part 2 of this series.

Cathy Hunt is an attorney in North Carolina representing business owners going through divorce and clients with complex financial estates. She also represents mothers and fathers with complex custody cases. Cathy has experience in the formation of business entities and subsequent representation on corporate matters, providing her with the expertise necessary to understanding complex equitable distribution cases, especially those involving business valuation issues. If you have a question about this article, you can email Cathy at chunt@divorceistough.com.

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