For many divorcing couples, alimony is one of the terms that has to be negotiated before the final decree is issued by the court. In many instances, the payer opts for monthly payments. However, there is an alternative option. You can choose to make one lump sum payment to your soon-to-be ex and end your financial obligation to him or her. If you are unsure if a lump sum payment will work for you, here is what you need to know.
How is the Lump Sum Calculated?
Before you and your spouse can agree on a lump sum, you need to determine just how much you plan to offer him or her. In calculating the amount, you need to take into consideration the present and future value of assets. In this instance, the asset would be the cash you plan to pay your spouse.
One misconception about calculating the buyout is that you would set an amount that you would pay monthly and multiply it by the number of months it would be paid. However, there are factors that can influence the amount that is paid.
Whether or not your spouse is planning to invest the money has a bearing on what you owe. With the right investment, the money could accumulate interest at least. If that is the case, the amount that you pay could potentially be reduced.
If you are planning to give up additional assets, such as your ownership in the family home, it could also be deducted from the amount that you would pay towards alimony.
Your spouse's potential for earnings can also impact the alimony. Even if you were opting for the monthly payments, the judge would take into consideration your spouse's ability to work and education. Therefore, you should, too.
What are the Tax Implications?
As the payer, you can likely deduct the lump sum payment to your spouse. Alimony payments have to meet certain requirements to be deductible and your attorney can ensure that your one-time payment does.
One of the requirements is that you and your spouse do not file joint returns. Whereas the payment is deductible for you, your spouse will have to claim the payment as income. You also have to make the payment in the form of cash, money order, or check.
In addition to these requirements, your divorce decree must specifically state that the payment is for alimony. Your attorney will guarantee that the language is accurate in the divorce agreement before the judge issues a final decree. Contact a professional from a firm like Larson, Latham, Huettl Attorneys to learn more.