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  1. #1
    Nick123 is offline Junior Member
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    Spousal Buyout Guidelines

    What is the name of your state (only U.S. law)? CA

    Any advise would be appreciated..

    We were married for 20+ years and are finalizing our marital divorce agreement.

    I am looking at potentially buying out me ex from alimony (spousal) payments. I am trying to figure out what I should offer her that is fair. Are there any guidelines out there or formulas that I can leverage? The key risk components that I believe should be accounted for in the offer calculation from my perspective is;

    - She could get re-married
    - She could cohabitate with someone
    - Given economic market conditions, there is always a risk of my job loss
    - Her earning potential could increase if she actually works full time or pursues education plans she has declared
    - She lives in Canada and I live in CA where we got divorced. The divorce was done in CA.
    This was a long-term marriage (20+ years).

    Any guidance would be appreciated.
    Thanks
  2. #2
    HomeGuru is offline Senior Member
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    Quote Originally Posted by Nick123 View Post
    What is the name of your state (only U.S. law)? CA

    Any advise would be appreciated..

    We were married for 20+ years and are finalizing our marital divorce agreement.

    I am looking at potentially buying out me ex from alimony (spousal) payments. I am trying to figure out what I should offer her that is fair. Are there any guidelines out there or formulas that I can leverage? The key risk components that I believe should be accounted for in the offer calculation from my perspective is;

    - She could get re-married
    - She could cohabitate with someone
    - Given economic market conditions, there is always a risk of my job loss
    - Her earning potential could increase if she actually works full time or pursues education plans she has declared
    - She lives in Canada and I live in CA where we got divorced. The divorce was done in CA.
    This was a long-term marriage (20+ years).

    Any guidance would be appreciated.
    Thanks
    **A: you raised some good issues but we have no boilerplate guidelines as each situation is different and we have no intimate details of yours and her specific situation.
  3. #3
    mistoffolees is offline Senior Member
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    Quote Originally Posted by Nick123 View Post
    What is the name of your state (only U.S. law)? CA

    Any advise would be appreciated..

    We were married for 20+ years and are finalizing our marital divorce agreement.

    I am looking at potentially buying out me ex from alimony (spousal) payments. I am trying to figure out what I should offer her that is fair. Are there any guidelines out there or formulas that I can leverage? The key risk components that I believe should be accounted for in the offer calculation from my perspective is;

    - She could get re-married
    - She could cohabitate with someone
    - Given economic market conditions, there is always a risk of my job loss
    - Her earning potential could increase if she actually works full time or pursues education plans she has declared
    - She lives in Canada and I live in CA where we got divorced. The divorce was done in CA.
    This was a long-term marriage (20+ years).

    Any guidance would be appreciated.
    Thanks
    For starters, do not start a new thread every time you have a question. Keep all your threads together.

    You're asking us to predict the future. You can pay alimony -and have an agreement that it ends if she gets married or cohabits with someone or that it be modifiable if circumstances change. Or, you can pay a fixed amount now and not have any future risk. How in the world do you expect us to predict the odds of any of those things?
    Last edited by mistoffolees; 09-18-2011 at 12:52 PM.
  4. #4
    LdiJ is offline Senior Member
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    Quote Originally Posted by Nick123 View Post
    What is the name of your state (only U.S. law)? CA

    Any advise would be appreciated..

    We were married for 20+ years and are finalizing our marital divorce agreement.

    I am looking at potentially buying out me ex from alimony (spousal) payments. I am trying to figure out what I should offer her that is fair. Are there any guidelines out there or formulas that I can leverage? The key risk components that I believe should be accounted for in the offer calculation from my perspective is;

    - She could get re-married
    - She could cohabitate with someone
    - Given economic market conditions, there is always a risk of my job loss
    - Her earning potential could increase if she actually works full time or pursues education plans she has declared
    - She lives in Canada and I live in CA where we got divorced. The divorce was done in CA.
    This was a long-term marriage (20+ years).

    Any guidance would be appreciated.
    Thanks
    You may want to reconsider the idea of the "buyout". Standard alimony is tax deductible to you and standard income to her under the IRS regs. Lump sum alimony is generally considered to be a property settlement and is not tax deductible.

    I understand the lure of a lump sum payment, but in the long term, you may cost yourself more money doing that. Of course if she never remarries and lives a long time, then a lump sum might end up being better, but you have no way to know what will happen in the future.
  5. #5
    Bali Hai is offline Senior Member
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    Quote Originally Posted by Nick123 View Post
    What is the name of your state (only U.S. law)? CA

    Any advise would be appreciated..

    We were married for 20+ years and are finalizing our marital divorce agreement.

    I am looking at potentially buying out me ex from alimony (spousal) payments. I am trying to figure out what I should offer her that is fair. Are there any guidelines out there or formulas that I can leverage? The key risk components that I believe should be accounted for in the offer calculation from my perspective is;

    - She could get re-married
    - She could cohabitate with someone
    - Given economic market conditions, there is always a risk of my job loss
    - Her earning potential could increase if she actually works full time or pursues education plans she has declared
    - She lives in Canada and I live in CA where we got divorced. The divorce was done in CA.
    This was a long-term marriage (20+ years).

    Any guidance would be appreciated.
    Thanks
    You are protected from all these factors for modification if you force the judge to order the alimony. Read the CA statutes. Unless you know 100% that the judge would order alimony (how much and how long) and you negotiated a clearly far better agreement, I would send the issue to the judge.

    How do you know she would receive an alimony award in the first place?
  6. #6
    Zigner is offline Senior Member
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    Quote Originally Posted by LdiJ View Post
    You may want to reconsider the idea of the "buyout". Standard alimony is tax deductible to you and standard income to her under the IRS regs. Lump sum alimony is generally considered to be a property settlement and is not tax deductible.

    I understand the lure of a lump sum payment, but in the long term, you may cost yourself more money doing that. Of course if she never remarries and lives a long time, then a lump sum might end up being better, but you have no way to know what will happen in the future.
    Question for you...
    If the OP (or somebody else in a similar position) were to offer "X" amount, but spread it out over several payments, would that still be considered a "lump sum" for tax purposes?
  7. #7
    mistoffolees is offline Senior Member
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    Quote Originally Posted by Zigner View Post
    Question for you...
    If the OP (or somebody else in a similar position) were to offer "X" amount, but spread it out over several payments, would that still be considered a "lump sum" for tax purposes?
    That would depend on the number of payments and the time.

    I do not believe there's a fixed amount of time that alimony must cover. Alimony can legitimately be alimony even if it lasts less than a year. Or, a payment might not be alimony even if stretched over 20 years if it doesn't meet the IRS rules. There's no simple rule that says alimony must be more than 1 or more then 3 or more than any other number of payments. In the end, it's going to come down to meeting the IRS requirements precisely.

    [url=http://www.irs.gov/taxtopics/tc452.html]Tax Topics - Topic 452 Alimony Paid[/url]
    [url=http://www.irs.gov/publications/p504/ar02.html#en_US_2010_publink1000175944]Publication 504 (2010), Divorced or Separated Individuals[/url]

    There are also rules about deductibility over time. For example, if you pay $4,000 a month in alimony for 3 years and then it stops abruptly, taxes for the last year or two might have to be recalculated and you could lose some of the deduction, at least in some states. That's why alimony is frequently ordered in declining amounts. That is, $large for 2 years, $medium for 2 years, $small for 2 years rather than $medium for 6 years (of course, it also helps with the rehabilitation aspect of alimony to do it this way).
  8. #8
    Bali Hai is offline Senior Member
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    Quote Originally Posted by Zigner View Post
    Question for you...
    If the OP (or somebody else in a similar position) were to offer "X" amount, but spread it out over several payments, would that still be considered a "lump sum" for tax purposes?
    If the alimony is clearly alimony (lump sum or periodic payments) falling within the IRS rules for deductibility, the IRS has no choice but to allow the deduction.

    If the IRS is suspicious of the lump sum payment, let them audit. I was audited (challanged) by the IRS about the deductibility of my alimony paid a few years ago. I presented the necessary evidence they requested and the deduction was allowed, no big deal.

    If they audit me again for the same thing, I now have all the necessary documents in a folder, I make copies and send them the same information again.
  9. #9
    LdiJ is offline Senior Member
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    Quote Originally Posted by Zigner View Post
    Question for you...
    If the OP (or somebody else in a similar position) were to offer "X" amount, but spread it out over several payments, would that still be considered a "lump sum" for tax purposes?
    The way the regs read, for it to be considered to be alimony is has to be paid in regular increments (preferibly monthly) for a certain amount of time, and that amount of time cannot be tied into children becoming adults.

    I have seen a couple of tax court cases where alimony was paid on a quarterly or even a yearly basis, but that was always in special circumstances where income came to the payor on a quarterly or yearly basis. Think farmer for a yearly basis (after the crops come in and are sold) and quarterly for a payor whose main income comes from quarterly dividends from an S-corp, or quarterly distributions from a partnership or LLC.
  10. #10
    LdiJ is offline Senior Member
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    Quote Originally Posted by mistoffolees View Post
    That would depend on the number of payments and the time.

    I do not believe there's a fixed amount of time that alimony must cover. Alimony can legitimately be alimony even if it lasts less than a year. Or, a payment might not be alimony even if stretched over 20 years if it doesn't meet the IRS rules. There's no simple rule that says alimony must be more than 1 or more then 3 or more than any other number of payments. In the end, it's going to come down to meeting the IRS requirements precisely.

    [url=http://www.irs.gov/taxtopics/tc452.html]Tax Topics - Topic 452 Alimony Paid[/url]
    [url=http://www.irs.gov/publications/p504/ar02.html#en_US_2010_publink1000175944]Publication 504 (2010), Divorced or Separated Individuals[/url]

    There are also rules about deductibility over time. For example, if you pay $4,000 a month in alimony for 3 years and then it stops abruptly, taxes for the last year or two might have to be recalculated and you could lose some of the deduction, at least in some states
    . That's why alimony is frequently ordered in declining amounts. That is, $large for 2 years, $medium for 2 years, $small for 2 years rather than $medium for 6 years (of course, it also helps with the rehabilitation aspect of alimony to do it this way).
    I do not believe that the bolded is correct at all. It is certainly not correct federally and as far as I know alimony is not one of those issues where any states don't follow the federal rules.

    While gradually decreasing alimony might help for the rehabilitation aspect, a gradually declining amount would actually raise red flags with the IRS. It makes the IRS inclined to believe that part of the alimony in the previous years was actually a property settlement rather than true alimony. I have one client who recently had to prove to the IRS, by supplying the divorce decree that a reduction in alimony was not due to a property settlement issue.

    The best way to have no red flags with the IRS is for alimony to be a consistant monthly amount, for a defined length of time. I do agree however that the defined length of time can be very short.

    However, if you have someone who makes 100k a year, and they pay out alimony in a lump sum of 150k, covering say, what should have been 6 years, I can guarantee that the IRS is going to assume that it was a property settlement, and might not back off from that issue unless the facts and figures cause them to believe that it was lump sum alimony.

    For example, if the payor could demonstrate that the payee got 1/2 of the marital assets PLUS a lump sum for alimony, then the IRS might buy it...but they would make the payor jump through major hoops to prove it...particularly in equitable distribution states.
  11. #11
    Bali Hai is offline Senior Member
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    Quote Originally Posted by LdiJ View Post
    I do not believe that the bolded is correct at all. It is certainly not correct federally and as far as I know alimony is not one of those issues where any states don't follow the federal rules.

    While gradually decreasing alimony might help for the rehabilitation aspect, a gradually declining amount would actually raise red flags with the IRS. It makes the IRS inclined to believe that part of the alimony in the previous years was actually a property settlement rather than true alimony. I have one client who recently had to prove to the IRS, by supplying the divorce decree that a reduction in alimony was not due to a property settlement issue.

    The best way to have no red flags with the IRS is for alimony to be a consistant monthly amount, for a defined length of time. I do agree however that the defined length of time can be very short.

    However, if you have someone who makes 100k a year, and they pay out alimony in a lump sum of 150k, covering say, what should have been 6 years, I can guarantee that the IRS is going to assume that it was a property settlement, and might not back off from that issue unless the facts and figures cause them to believe that it was lump sum alimony.

    For example, if the payor could demonstrate that the payee got 1/2 of the marital assets PLUS a lump sum for alimony, then the IRS might buy it...but they would make the payor jump through major hoops to prove it...particularly in equitable distribution states.
    A clearly written divorce decree clearly stating that the lump sum alimony payment is in lieu of periodic alimony payments should suffice.
  12. #12
    mistoffolees is offline Senior Member
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    Quote Originally Posted by LdiJ View Post
    I do not believe that the bolded is correct at all. It is certainly not correct federally and as far as I know alimony is not one of those issues where any states don't follow the federal rules.
    Here's the rule:

    [url=http://www.divorcedex.com/divorce/Alimony-6.shtml]Divorce Dex.com: Alimony[/url]

    "(When divorcing couples improperly call a property division alimony, they run the risk of recapture by the Internal Revenue, which happens when the alimony paid decreases by more than $15,000 annually within a three-year period after a divorce."

    If the alimony decreases too fast and too soon after divorce, recapture rules come into play.
  13. #13
    LdiJ is offline Senior Member
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    Quote Originally Posted by mistoffolees View Post
    Here's the rule:

    [url=http://www.divorcedex.com/divorce/Alimony-6.shtml]Divorce Dex.com: Alimony[/url]

    "(When divorcing couples improperly call a property division alimony, they run the risk of recapture by the Internal Revenue, which happens when the alimony paid decreases by more than $15,000 annually within a three-year period after a divorce."

    If the alimony decreases too fast and too soon after divorce, recapture rules come into play.
    You have that completely backwards Misto....

    The IRS fully understand that alimony is awarded in the majority of cases for a specific length of time. Therefore the abrupt END of alimony does not raise any red flag at all.

    Its when alimony significantly DECREASES but doesn't end, that it raises the red flag. You are misunderstanding what you are reading.

    However, you don't have to believe me. There are many tax forums that you could go to and ask the same question.
  14. #14
    LdiJ is offline Senior Member
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    Quote Originally Posted by Bali Hai View Post
    A clearly written divorce decree clearly stating that the lump sum alimony payment is in lieu of periodic alimony payments should suffice.
    Bali, do you have any idea how many people try to do something like that in order to disguise a property settlement as alimony? Yes, it has to clearly describe that, but the property settlement also has to make sense in order for the IRS to buy it.

    Plus, since there are no carryforwards for alimony, if the lump sum alimony was higher than the payor's taxable income they wouldn't get the full deduction...even if the IRS agreed that it was alimony.
  15. #15
    tranquility is offline Senior Member
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    Trace the steps the IRS does with the OPs facts. See, [url]http://www.irs.gov/pub/irs-wd/0246029.pdf[/url].

    LAW AND ANALYSIS
    Section 71(a) of the Code includes amounts received as alimony or separate
    maintenance payments in gross income. Under § 71(b), the term “alimony or separate
    maintenance payments” means any payment in cash if (A) such payment is received by
    (or on behalf of) a spouse under a divorce or separation instrument, (B) the divorce or
    separation instrument does not designate such payment as a payment which is not
    includible in gross income under this section and not allowable as a deduction under §
    215, (C) in the case of an individual legally separated from his spouse under a decree
    of divorce or of separate maintenance, the payee spouse and the payor spouse are not
    members of the same household at the time such payment is made, and (D) there is no
    liability to make any such payment for any period after the death of the payee spouse
    and there is no liability to make any payment (in cash or property) as a substitute for
    such payments after the death of the payee spouse.
    Section 71(b)(2) defines “divorce or separation instrument” as (A) a decree of divorce or separate maintenance or a written instrument incident to such a decree, (B) a
    written separation agreement, or (C) a decree (not described in subparagraph (A))
    requiring a spouse to make payments for the support or maintenance of the other
    spouse.
    Section 215(a) provides that an individual shall be allowed as a deduction an
    amount equal to the alimony or separate maintenance payments paid during such
    individual’s taxable year. Under § 215(b), the term “alimony or separate maintenance
    payment” means any alimony or separate maintenance payment (as defined in § 71(b))
    which is includible in the gross income of the recipient under § 71.
    If a payment satisfies all of the factors set forth in § 71(b), then it is alimony; if it
    fails to satisfy any one of the above factors, it is not alimony. Jaffe v. Commissioner,
    T.C. Memo. 1999-196. The facts and representations set forth in your submission
    indicate that the requirements in subparagraphs (A), (B), (C), and (D) of § 71(b)(1) are
    satisfied with respect to the Payment to be made to Former Spouse.
    In the instant case, the Court Order is a divorce or separation instrument under
    § 71(b)(2) as it requires Taxpayer to make payments for the support and maintenance
    of Former Spouse under Section 3 of the Court Order. Former Spouse will receive the
    Payment in cash pursuant to the Court Order. The Court Order does not exclude the
    Payment from Former Spouse’s gross income or preclude Taxpayer from deducting
    Payment under § 215. Taxpayer and Former Spouse have not shared the same
    household since the divorce. Taxpayer is not required to make any payments after
    Former Spouse’s death pursuant to Paragraph 16, Sentence 1 of the Settlement
    Agreement, which is incorporated within the Court Order. The Payment is not a child
    support payment because it is not contingent on events associated with any children in
    the Court Order. Accordingly, the Payment to be made to Former Spouse is alimony or
    separate maintenance within the meaning of § 71 of the Code, and thus, deductible by
    Taxpayer under § 215 when Payment is made.

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