Alimony is a financial payment that one spouse makes to another spouse following the end of the couples marriage. Following the end of a couple's marriage, they must work out a variety of financial details. One such detail, alimony, is a payment that one spouse must make to the other following divorce. Also referred to as spousal maintenance, alimony can be structured in either a lump some or monthly payment. How to structure the payments depends on the unique financial situation of the particular couple. Minnesota couples going through divorce might find the following piece on spousal maintenance and tax consequences interesting.
Depending on how a person structures their payments, and chooses to fund their spousal support, it is possible to incur serious tax penalties. Typically, alimony is taxable to the person who receives the funds, not the person who pays them. However, sometimes people in this situation make mistakes. According to a recent article, a husband was penalized more than $5,000 after he withdrew $50,000 from his retirement account to pay his former spouse alimony.
The husband was ordered to withdraw the funds by the judge. Unfortunately, the man did not withdraw the funds correctly. To withdraw funds from retirement accounts in a divorce, the person needs a qualified domestic relations order. A QDRO allows individuals to withdraw certain funds without incurring tax penalties. Having the payment structured through a QDRO would shift the tax penalty from the person paying to the person receiving the payment.
The above is an example of why it is so important to work with a family law attorney that has significant financial experience. Financial literacy is everything in a divorce. This is especially important when dealing with a high asset divorce. There are many good divorce attorneys, but there are fewer who have the financial knowledge to address truly complex estates.
Source: Forbes, "Penalty On Qualified Plan Withdrawal To Pay Alimony," Peter J Reilly, Nov. 10, 2012
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