What does Alimony really cost?

This morning I took part in a training call for some software I use to help me calculate different alimony scenarios for clients.  What is great about the software is that it allows my clients to see what effect taxes will have on their alimony payments.  If you are receiving alimony, many people forget that they will have to pay tax on that income.  On the other hand, if you are the supporting spouse that is paying alimony, you will get to deduct the alimony you pay to your spouse.

So what does this look like in real numbers?  Here is a quick hypothetical.  Assume that the supporting spouse makes $120,000 per year, and the dependant spouse makes $30,000 per year.  The supporting spouse itemizes their deductions, while the dependent spouse takes the standard deduction.  They have two kids which also provides some deductions to the dependent spouse.  The dependent spouse receives child support and $1,500 per month in alimony.  How much cash does this actually give the receiving spouse on an after tax basis, and how much is the supporting spouse actually paying?

In my hypothetical example, the supporting spouse saves $484 per month on their tax bill.  That means that instead of paying $1,500 per month in alimony, the supporting spouse is paying $1,016.  On the other hand, the receiving spouse is not actually receiving $1,500 per month, because they have to pay tax on their alimony income to the tune of $531 per month.  So their after-tax income is actually $969 per month.

Taxes play a huge role in the payment of alimony, and many clients (and attorneys) forget this.  Don’t make this mistake.  I’ve attached a pdf file with the calculations presented above.  This is an example of the powerful software I use so that my clients know the whole story before agreeing to an alimony figure that forgets to account for taxes.

Alimony After-Tax Example