In this episode: Alimony is cash flow from one former spouse to the other, but it’s never guaranteed. Jon Peyton explains what alimony is for, how states approach it, how the 2017 tax law changed it, and the clauses and risks both the payer and the recipient should understand.
Key insights
- Alimony (spousal support) is meant to help a spouse maintain the lifestyle the marriage created, for a period of time or, less often, permanently.
- No one is automatically entitled to it. Each state sets its own rules, and many lean toward rehabilitative, time-limited support.
- Under the Tax Cuts and Jobs Act, alimony paid under agreements executed after 2018 isn’t deductible for the payer or taxable to the recipient.
- An agreement can end alimony if the recipient remarries or lives with a new partner.
- A larger share of the estate given in place of alimony isn’t alimony, and the recipient may still be able to ask for support later.
- Either spouse can ask the court to change payments when circumstances change, such as a job loss.
Episode timeline
- 0:00 Introduction
- 0:32 Income streams vs. property settlement notes
- 1:50 Why alimony exists
- 3:47 How alimony is calculated: a $100,000 household
- 5:05 How states set the amount and length
- 6:35 Rehabilitative vs. permanent alimony
- 8:40 Alimony tied to retirement
- 9:25 Alimony isn’t guaranteed
- 10:00 How the tax law changed alimony
- 11:30 Jon’s view on the change
- 13:45 Alimony is separate from child support
- 14:10 Remarriage and cohabitation clauses
- 15:30 Extra assets in place of alimony
- 17:25 When payments are adjusted
The episode in brief
Income, or cash flow? Alimony and child support are the two support payments that can follow a divorce. People often call them income, but they’re really cash flow: money coming in to support a former spouse or the children. This episode is about alimony.
What it’s for. Alimony has traditionally helped a spouse keep the lifestyle the couple built together. Jon’s example: one spouse stayed home to raise the children while the other climbed the corporate ladder. Because they built that household together, the spouse at home may be entitled to support to maintain it for a time.
How it’s figured. Courts look at the lifestyle you had together and what two separate lifestyles would cost. In Jon’s illustration, a household earns $100,000, sets aside savings and spends about $50,000 to $55,000 a year. If each spouse’s share of that lifestyle is $25,000 to $30,000, one might pay the other that amount each year. Real calculations are more involved and vary by state.
Temporary or permanent. Some states consider the length of the marriage; some consider the cause of the divorce. Rehabilitative alimony runs for a set period, perhaps one, five or ten years, while the recipient returns to work and rebuilds savings. Jon has mostly seen permanent alimony after long marriages, often 20 years or more, where one spouse earned far less, or near retirement, when the assets alone won’t support both people. Some agreements tie alimony to the payer’s retirement.
It isn’t guaranteed. No one is automatically entitled to alimony. It comes down to state law, the court and what the two of you negotiate.
The tax change. Alimony used to be deductible for the payer and taxable to the recipient. Under the Tax Cuts and Jobs Act, for divorce agreements executed after December 31, 2018, the payer can’t deduct it and the recipient doesn’t report it as income. Jon’s view: that may be reasonable for support that lasts a few years, but it’s hard on a high earner paying for a long time. In his example, someone earning $1 million who pays $100,000 a year for ten years pays tax on that money while transferring $1 million to the other spouse tax-free.
Clauses to consider. Alimony is for the spouse; child support is separate and comes on top of it. An agreement can say alimony ends if the recipient remarries, or if they move in with a new partner, so they aren’t sharing expenses with someone new while still receiving support.
Assets in place of alimony. You can offer a bigger share of the estate instead of paying alimony, but that isn’t alimony. If the recipient spends through it, they may be able to go back to court and ask for support, and you could end up paying both.
When circumstances change. If the payer loses a job or takes a lower-paying one, they can ask the court to reduce payments. The court may or may not agree. If you receive alimony, a cut could force you to adjust quickly, and a drop from $60,000 a year to $25,000 can be dramatic, especially if you’re still back in school or rebuilding a career. Know when your alimony could end or change, and plan for it.
Key action items
- Look up your state’s alimony rules, including whether it favors rehabilitative or permanent support.
- Estimate the cost of two separate households before negotiating an amount.
- Check the date of your agreement with your CPA to confirm how alimony is taxed for you.
- Ask your attorney about end-date clauses such as remarriage, cohabitation or retirement.
- If you receive alimony, build a budget that still works if payments change or stop.
Listen next: Episode 13: What You Need to Know About… Child Support
Jon Peyton previously held the Certified Divorce Financial Analyst® (CDFA®) designation and no longer holds it. References in this episode reflect his credentials at the time of recording.
This episode is educational and isn’t legal, tax or financial advice. Speak with your own attorney and advisers about your situation.