Welcome to our spousal support page. In this article, we’re going to talk about spousal support as it relates to your California divorce. There are 3 basic questions and answers that should give you a solid foundation of knowledge once you’re done reading.
First, what is spousal support, and the different types you’d expect to encounter? Second, the tax implications of spousal support, and finally, tips and tricks for dealing with your spousal support issues in CA.
Spousal Support: Definition and Types
What is Spousal Support?
You might have heard of it as alimony – money paid from one spouse to the other for maintenance and basic living expenses for that person to continue with their marital standard of living. The marital standard of living is essentially how both parties lived during the marriage as it relates to finances and day to day standards of life. Did one person support the other? Did both if you contribute equally? We want to take a look at these factors when determining what spousal support amount would be appropriate..
There are two basic types of spousal support in California: Temporary and permanent. Temporary support is based on a “guideline formula” (a % of your net incomes combined would be available as an amount for spousal support). However, the law boils it down to need and ability. In other words, one person’s need for spousal support and the other person’s ability to pay it.
It’s important to know that every county has its own standards and implications – we are divided into different regions for how the guidelines apply. For example, we have a “Santa Clara guideline” and that covers counties even as far as Solano County. We have “Alameda guidelines” which cover counties such as Contra Costa. Falling under a Santa Clara County guideline doesn’t necessarily mean that you have to reside in Santa Clara. You can be under that guideline, while living in a completely different county. We’re divided up in regions by what the presumptive formula is.
Temporary Spousal Support
Temporary spousal support is a misnomer – many people think that has an expiration date, or that it is in effect for one month or two months. The reality is that temporary spousal support can persist for a very long time, including the entire divorce proceeding. Your divorce might be taking three, four, or five years. We don’t want that to happen, but in case it did, your temporary spousal support amount would be in place during that period of time. With that in mind, it’s very important to have a solid grasp and knowledge of your income.
Permanent Spousal Support
Permanent spousal support is the result of two possible circumstances – an agreement by both parties on an amount, or the judge ultimately deciding what the proper amount is. In either outcome, we’re looking at a series of guidelines that are different than those of temporary support. What is examined are the factors that are found under Section 4320 of the California law Family Code (we have that on our website if you want to read further). It breaks down into fourteen different factors, including the age and health with the parties, the marital standard of living, whether one parent has helped the other by staying home and taking care of the children, whether one person has helped the other attain their career (i.e. they worked while the other one went to medical school and then went to be a “stay at home” mother), history or occurrences of domestic violence, relative assets, relative debts, tax implications, respective separate property, and anything that is fair and just to arrive at an amount for spousal support. If the two parties cannot agree on an amount, the judge is going to base the support on the previously mentioned factors (usually after a trial).
Most people end up actually agreeing on amount of spousal support, and while you can’t use the temporary support formula directly, it can be used as a baseline – somewhere to start when you’re talking about spousal support negotiations.
Tax Implications of Spousal Support
The next area we’re going to discuss are the tax implications of spousal support. The first thing to remember is that spousal support is taxable income to the recipient, and tax deductible to the person paying spousal support – and this is a federal rule. In fact, if you look at your tax return on page 1 of your tax return, you’ll see something called “alimony received” or “alimony paid”, and it’s either going to be income to you if you’re receiving it, or deducted if you’re paying it.
Why is it so important to understand the tax implications of spousal support? It’s crucial as part of your financial planning purposes. Let’s assume you’re receiving a significant amount of monthly spousal support ($2,000), and yearly, $24,000. Unlike a job, spousal support doesn’t automatically withhold taxes so even though you have received $24,000 of spousal support throughout the year, you’ve received that as a gross (pre-tax) amount. When the time comes to file your taxes, you might be surprised to learn they actually have to pay income tax for entire amount. You can take a guess what happens if you haven’t budgeted for that during the year – you now owe money to the IRS, and it’s money you don’t have. Therefore, it’s very important if you are receiving spousal support that you’re working with a tax planner, financial planner, or even your attorney for guidance in order to give you an idea of how much to put in savings for tax time.
What happens if you’re the person paying spousal support? Well if you’re like the majority, once you get that order for paying spousal support, it’s a financial hardship. Suddenly your income is cut by a significant chunk, and you’re finding yourself unable to meet your basic financial obligations. Between the tax they’re taking out of your paycheck, and the spousal support (maybe even the child support) suddenly you’re looking at (or less) than a third of your usual income. This is all you have to live off and pay rent/mortgage, credit card bills, utilities, car payments, etc. Suddenly, there’s not enough money. What can be done to lessen this burden? As mentioned, spousal support is tax deductible so you might consider adjusting your withholdings on your W-2. Most people are fairly conservative, and they’re going to list “single”, claiming themselves ( indicated by a “1” on the W-2 form), or themselves in addition to another (“2” on the form). If you go back to your employer, and change your W-2, and withhold less in taxes, you’re going to have a larger paycheck. For more info, consult with your employer’s HR or compensation department. Why is this a smart strategy? It’s going to give you more on a month to month basis knowing that you get to deduct a large amount of alimony or spousal support when it’s time to file your taxes. Obviously you want to have more money on a month to month basis – especially in the middle of a divorce. I do not advise, however, that you just go and randomly pick a number. You want to actually work with the tax consultant or financial planner, or your attorney to figure out the appropriate number of withholding allowances so you don’t end up owing to the IRS when taxes are due.
What you want to do is get close to a break-even point, where you’re maximizing the amount of money that you have in your bank account at the end of each month, and not having to owe the government at the end of the year when you file your taxes.
Spousal Support: Tips and Tricks
The most important thing I can advise is proper preparation. Specifically, this means understanding what your actual income is. We live in a day and age where most people get direct deposit, and paychecks are paperless – people don’t actually look at their hard checks. In my experience, many people don’t know if they contribute to a 401K, have medical insurance, pay union dues, mandatory retirement, etc. Most simply ensure that money was deposited (if at all). This is a major mistake when going through a divorce! People are surprised that they earn more income than they assume, or are surprised to find that earn less income than originally thought. By not knowing your true income, you’re only doing yourself a disservice – especially if you are over-inflating your assumed amount. In this scenario, you’re going to be paying support based on income that you’re not actually bringing home. You’re not going to be able to survive, and your ex-spouse is going to have a false sense of the amount of money that he or she will receive to live off of. Actual income figures are vital in being able to calculate support.
Pay structure is another important factor to be aware of. Are you compensated hourly, or on a set salary? Do you receive incentives and perks for things like bonuses, commissions, or stock awards? How does that impact your support? If, for example, you have what I call a “complicated pay structure”, meaning you receive bonuses or you receive restricted stock units or you stock options – what does that do to your W-2? Is it included on your W-2? Is it excluded from the W-2? I’ve worked with clients who get tax breaks as part of incentives for their employment. It’s part of their W-2, but they never see it in their income. Your spouse might be thinking you have certain amount of money, when you don’t actually have that amount. Bottom line: It’s very important to understand your pay structure to make sure that you’re paying the appropriate amount of support.
Let’s now assume you’re the recipient of spousal support. It’s important to understand your spouse’s pay structure and actual income, and more importantly, you need to understand that spousal support is not something that you can rely on for the rest of your life. If there is one token of advice I can give to clients who are receiving spousal support, it’s to be used as a “safety blanket”, like insurance. You don’t rely on it forever. The main reason is that spousal support is never guaranteed – your spouse could lose his or her job, they may pass away, become disabled, and unable to work anymore. If you have built your entire future around this support that isn’t guaranteed for the rest of your life, you place yourself in a dangerous position. I always encourage clients to seek out ways of becoming self-sufficient. Not only does the law want to see you putting effort toward self sufficiency, it’s just simply better for your future and new life.
Steps toward self-sufficiency and achieving independence include going back to school, getting a job, or investment of the income you possess. I am an advocate of spousal support. It is appropriate in many situations and it’s something that you may need to get back on your feet. For more advice and information, please review the rest of our website. If you still have questions, please contact us and we’ll be happy to assist.