Most people in California are familiar with the concept of spousal support in the form of monthly payments made from one person to a former spouse. While this is a common approach to alimony, there is an alternative. Some people choose to handle alimony as a one-time, lump sum payment.
There are many reasons why a person might elect to make a lump sum payment. Some people may feel worried about the consequences of missing a payment, while others simply do not like the idea of being financially tethered to an ex for years to come. Recipients may prefer this approach, too. A lump sum payment must be equal to the predicted amount of all future payments, but it often works out to be worth more given their ability to invest some of the money.
However, as with most things in life, there is still one significant concern couples should consider before taking the lump sum approach — taxes. Depending on how the payment is labeled, the recipient may be taxed on the full amount for the year in which the alimony was received. A label of “alimony” will lead to this type of taxation, while labeling the lump sum payment a “settlement” may mean the recipient does not have to pay taxes on the full amount.
There are certain financial consequences to divorce, including lower household incomes and potential tax ramifications. However, these types of concerns should not prevent unhappy couples in California from pursuing divorce. By staying focused the possible financial implications of decisions regarding alimony, asset division and more, couples can usually reach the most agreeable settlement possible.