IMPORTANT FEDERAL ALIMONY/SPOUSAL MAINTENANCE TAX CHANGES: For divorce and separation agreements or divorces finalized on or after January 1, 2019, the 2017 tax reforms eliminate the tax deduction for the payer of alimony/spousal maintenance and the requirement of the receiver to report these payments as income. Any divorce and separation agreements or divorces finalized before the end of 2018 will continue to be governed by the old law and the deduction and income reporting will still apply.
The old law deduction for alimony/spousal maintenance is an important and valuable benefit for the spouse who receives alimony, not just for the spouse who pays it. If you will be a receiving spouse, be careful not to get lured into delaying divorce or separation agreements or divorce until 2019 with the idea that not paying taxes on alimony is always better.
In "Why the Alimony/Spousal Maintenance Tax Changes Matter to You" (below) we illustrate how a receiving spouse may retain more alimony after paying taxes under the current law than not paying taxes under the new law. Something else to consider that could make alimony go a lot further: under the old law a spouse receives alimony pre-tax which s/he can deposit into an IRA to save for retirement.
For all of these reasons, both spouses should consult a financial professional together during mediation to assess the best outcome under the old and new law for their individual situation. What they learn will affect their negotiations in mediation, the timing of their agreements and/or divorce, and their finances now and for many years to come.
Don't Wait: Plan ahead now and get thyself into mediation so you don't miss the opportunity to take advantage of the old law. Detente is ready to help you efficiently work through the considerations for alimony in Texas that are outlined in the rest of this article.
The majority of Detente mediation clients reach agreements and finalize a divorce in a matter of months. In contrast, a contested, litigated divorce with lawyers may not finish in less than two years. Expect lawyers and the courts to be completely swamped with spouses scrambling at the end of 2018 to get legally binding agreements and to finalize divorces. If your goal is to get an agreement about alimony and/or to finalize a divorce in 2018, don’t forget to figure in the 60 day waiting period (unless there’s family violence) between the day the divorce petition is filed and the first day a judge can finalize the divorce.
If you wait too long to start mediation and many are ahead of you, there won't be enough time to finish mediation, draft agreements, and file a petition - much less to get in line at the courthouse after the 60 days to finalize the divorce before the end of 2018.
Note: There is also an option under IRS rules under the old law to agree to make the alimony not deductible to the payer and not taxable to the receiver. This happens most often when the deduction will be fairly insignificant to the payer, or the length of payment is relatively short, and/or the differences between the payer and receiver’s tax brackets don’t result in a big enough savings to the payer to make it worth the trouble of the payer’s managing the accounting of the deductions and the receiver’s paying income taxes. If you like this option, you can figure out how much the deduction would be to the payer and then agree the payer will pay that reduced amount to the receiver with no tax implications to either of them. If the payer does not claim the deduction, then the couple can agree on when alimony ends or reduces without concern about IRS recapture rules.
Why the alimony/spousal maintenance tax change matters to you:
Hypothetical: Suppose the spouse who pays alimony/spousal maintenance can afford to pay only $750 per month to the receiving spouse and the paying spouse’s income tax rate is 25% (there is no current 25% tax rate; but it works here for easy illustration). Assume the receiving spouse’s income tax rate is10% (which is a current tax rate).
Result under old law with alimony/spousal maintenance deduction: When the paying spouse can deduct the alimony/spousal maintenance payments, the paying spouse can actually pay the receiving spouse $1000 per month. This is because the paying spouse saves $250 in taxes (25% x$1000) every month which meets the paying spouse’s $750 per month limit. The receiving spouse actually gets $1000 per month, and pays income taxes of 10% on that money, effectively giving the receiving spouse $900 per month. In other words, under the old law the receiving spouse gets $900 at a cost of $750 to the paying spouse.
Result under new tax law without almony/spousal maintenance deduction: When the paying spouse cannot deduct alimony/spousal maintenance payments then the paying spouse can only afford to pay $750 per month and the receiving spouse only gets $750 per month. The receiving spouse gets $150 less each month than if the paying spouse had the deduction and the receiving spouse paid taxes on the money. Under the new law the receiving spouse loses money compared to the old law, even though intuitively it would seem like the receiving spouse would benefit from not paying income taxes on the alimony/spousal maintenance payment under the new law.
**The example above uses disparate tax rates between the paying spouse and the receiving spouse to illustrate the monetary effects of the old law versus the new law on the receiving spouse. The differences between the old law and the new law become less significant for the receiving spouse the closer the receiving spouse's tax rate is to the tax rate of the paying spouse. On or after January 1, 2019, if former spouses modify the terms of alimony/spousal maintenance to be different from those in an already finalized decree, they will need to state in the modification order that they wish to retain the deduction under the old law if they want the alimony/spousal maintenance payments to remain deductible.
Does Texas Have Contractual Alimony or Spousal Maintenance? Yes.
Yes! In Texas spousal support (a/k/a "spousal maintenance" or "contractual alimony") is additional money, not part of a division of marital property or child support, that one spouse pays to the other temporarily from future income to support the ex-spouse after the divorce. If this money is also paid before the divorce is finalized, it is called “temporary spousal support”. Whether a former spouse receives spousal maintenance or contractual alimony in Texas is more than a legal and economic question. It is one of the trickiest emotional issues of divorce.
Financial discussions during divorce can be difficult. A spouse often requests spousal support when he or she does not make as much money as the other, lacks a college degree, has been out of the work force raising the children or is facing a challenging job market. That spouse may feel deserving of compensation after divorce for sacrificing his or her own education and job to raise the family, manage the household, and support the other’s career. For the spouse contemplating paying spousal maintenance or alimony, it can be equally challenging to think about supporting the ex-spouse over and above child support and the divorce settlement if the soon to be former spouse contributed substantially fewer or no earnings during the marriage.
Spouses frequently blame themselves or each other for "creating" or "allowing" the circumstances that now necessitate spousal supoort. Spouses need to remember the actions they took in the past were decisions they made together in their family's best interests based on the information each of them had at the time. There was no crystal ball that could have foretold divorce, and if there had been, they probably would have made different choices. Ease up on each other. Move forward to understand what options and benefits there are under Federal tax laws and Texas law for spousal support.
What Are Court Ordered Spousal Maintenance and Contractual Alimony in Texas?
Texas has two types of spousal support: “court ordered spousal maintenance” and “contractual alimony”. There are significant differences between them: how you get them; how much they pay out; how long they last; and how they are changed or enforced.
The first major difference is court ordered spousal maintenance is the kind a family judge can order a spouse to pay involuntarily in litigation. In contrast, contractual alimony is spousal support the spouses agree to themselves (the court still has to approve the agreement as part of the divorce). Many times spouses in mediation want to understand what the law provides for court ordered spousal maintenance to guide their own decisions about what to agree to for contractual alimony.
How Do I Get Court Ordered Spousal Maintenance in Texas?
“Court ordered spousal maintenance” is the kind a family judge can order a spouse to pay involuntarily. But just because the law provides for it does not mean it is easy to get, that it will be a large amount of money, or it will last forever. To the contrary, the eligibility requirements for court ordered spousal maintenance are high, the amount and duration are restricted, and it can be changed or eliminated later. There is no "palimony" in Texas, meaning a court cannot require someone to pay spousal support if there was no ceremonial or common law marriage.
Why is court ordered spousal maintenance limited in Texas? Texas law provides for court ordered spousal maintenance only in limited circumstances. Texas is a community property state in which all community marital assets and liabilities are divided in a “just and right” manner on divorce by a judge, unless the spouses reach their own division by agreement themselves. In community property states like Texas, the financial division on divorce is usually as close to fifty-fifty asset by asset whenever possible, or if an asset cannot be divided, then it is offset by a different asset of equivalent value that is given to the other spouse. Generally, wages, bonuses, and income are divisible community property in Texas whether there is one breadwinner in the family or two. That means the court does not give all the money only to the spouse who earned it, and a homemaker is not penalized in the community property division for not working outside the home. For this reason, some see Texas’s community property laws as “protecting” a non-working or lower wage earning spouse on divorce.
An ideal in Texas is it is in everyone’s best interests for as many people in Texas as possible to be employed. The theory is court ordered spousal maintenance can be a financial bridge between divorce and self-sufficiency. This is why it is often referred to as "rehabiliative" support. However, there is a prevailing view as well that spousal support creates a disincentive for a divorcee to return to gainful employment. That is one of the reasons the Texas legislature makes it tough for a former spouse in Texas to get court ordered spousal maintenance. However, Texas also recognizes that people need some help after divorce if they have been out of the work force, lack education, became disabled during marriage, must care for a disabled child and cannot work, or have experienced family violence.
If the parties are trying to reach an agreement for contractual alimony, why do the procedures for court ordered spousal maintenance matter? First, it is important to understand what the law provides in order to determine whether or not a spouse would be eligible for court ordered spousal maintenance if there is no agreement in mediation for voluntary payment of contractual alimony. Second, because Texas treats alimony by agreement as a contract between spouses (hence “contractual alimony”), the provisions the spouses agree to in writing about the contractual alimony are the same provisions the court looks to if there is a problem down the road. In other words, Texas does not impose rules for eligibility, amount, duration, and enforcement of contractual alimony like it does for court ordered spousal maintenance. However, looking at the rules for court ordered spousal maintenance may help you to decide what provisions you may want to write into any agreement you make together for contractual alimony.
Eligibility for Court Ordered Spousal Maintenance. In September 2011 Texas substantially changed the eligibility rules for court ordered spousal maintenance. Under the 2011 law the spouse must first prove that after divorce (meaning after the division of assets and liabilities) there will not be enough property (including that spouse's separate property) to meet his or her minimum reasonable needs (which usually means the spouse’s monthly expenses).
After proving that, the spouse must also prove at least one of the following:
- the marriage has been for ten years or longer and the spouse made diligent efforts to either earn sufficient income or to develop necessary skills while the divorce is pending to meet his or her minimum reasonable needs; or
- the other spouse has committed family violence; or
- the requesting spouse has an incapacitating disability that arose during marriage; or
- a child of the marriage (of any age) has a physical or mental disability that prevents the spouse who cares for and supervises the child from earning sufficient income.
A former spouse cannot request court ordered maintenance if that former spouse cannot meet his or her minimum reasonable needs because after divorce he or she lost a job or became incapacitated with a physical or mental disability.
Tip #1 for Seeking Court Ordered Spousal Maintenance in Texas: Don't Quit Your Job or Refuse to Look for Suitable Work, Training, or Education While the Divorce is Going On!
Texas law requires a spouse seeking court ordered spousal maintenance who has been in a ten year or longer marriage to prove he or she tried diligently while the divorce is pending to earn enough money to support him/herself or to prepare for gainful employment by going back to school or getting training to develop necessary skills for work. Don't get suckered into plotting to quit a job or intentionally refusing to better yourself during divorce. The consequences can be devastating.
Tip #2 for Seeking Court Ordered Spousal Maintenance in Texas: Don't Try to Be Sneaky! Family judges know every trick, ruse, and excuse lawyers and parties use to try to get spousal maintenance or to avoid paying it. Spouses who misrepresent their own need and eligibility for court ordered spousal maintenance or their ability to pay what is requested will quickly and irreparably lose credibility with the judge and each other.
Amount of Court Ordered Spousal Maintenance. If the judge finds a spouse is eligible for court ordered spousal maintenance, the judge has to decide how much to order and for how long. In most cases, the upper limit of the amount is the difference between the spouse’s monthly expenses and that spouse’s income, but that does not end the question. Determining the amount is not a simple math equation. By law, the judge must also consider:
- each spouse’s financial resources after divorce (including separate property);
- how paying child support or spousal maintenance affects both spouses’ ability to pay their bills;
- one spouse’s contribution to the other’s education, training, or increased earning power;
- the age, employment history, earning ability, and physical and emotional condition of the requesting spouse;
- each spouse’s education and employment skills and how long it would take for the spouse asking for maintenance to get education or training;
- whether either spouse inappropriately spent community funds or disposed of community property during marriage (also called “fraud on the community”);
- homemaker contributions;
- marital misconduct of either spouse; and
- family violence.
Maximum Court Ordered Spousal Maintenance in Texas. The cap on court ordered spousal maintenance in Texas is set by statute. The amount of spousal maintenance the judge orders a spouse to pay involuntarily cannot be more than $5000 per month or 20% of the paying spouse’s average monthly gross income, whichever is lower.
Gross income includes:
- 100 percent of all wage and salary income and other compensation for personal services (including commissions, overtime pay, tips, and bonuses);
- interest, dividends, and royalty income;
- self-employment income;
- net rental income (defined as rent after deducting operating expenses and mortgage payments, but not including noncash items such as depreciation); and
- all other income actually being received, including severance pay, retirement benefits, pensions, trust income, annuities, capital gains, unemployment benefits, interest income from notes regardless of the source, gifts and prizes, maintenance, and alimony;
and does not include:
- return of principal or capital;
- accounts receivable;
- benefits paid in accordance with federal public assistance programs;
- benefits paid in accordance with the Temporary Assistance for Needy Families program;
- payments for foster care of a child;
- Department of Veterans Affairs service-connected disability compensation;
- supplemental security income (SSI), social security benefits, and disability benefits; or
- workers' compensation benefits.
Length of Court Ordered Spousal Maintenance in Texas. Generally, court ordered maintenance must be limited to the shortest reasonable time that allows the receiving spouse to earn enough money to meet monthly expenses unless the spouse has a mental or physical disability, is caring for an infant or young child, or there is some other compelling reason the spouse cannot provide for his or her minimum reasonable needs. If any of these is the basis for extended or indefinite spousal maintenance, the paying spouse or the court may ask for a review every so often to see if the other spouse still qualifies.
Caps on Duration. There are restrictions in the law for how long a judge can require a spouse to pay court ordered maintenance in Texas.
|BASIS FOR AWARD||LENGTH OF MARRIAGE||MAXIMUM DURATION|
|Family Violence||Less than 10 years||No more than 5 years|
|Married 10+ years||Between 10 and 20 years||No more than 5 years|
|Married 10+ years||Between 20 and 30 years||No more than 7 years|
|Married 10+ years||30 years or more||No more than 10 years|
|Disabled spouse||N/A||As long as spouse is eligible|
|Disabled child of marriage||N/A||As long as spouse is eligible|
Enforcement of Court Ordered Spousal Maintenance. It is very important to understand that even if a spouse is successful in persuading a judge to award court ordered maintenance, and even though the court can enforce that order by contempt (fine or jail time), it still is not a sure bet. The paying spouse can come back to court and ask for the amount he or she pays to be reduced or eliminated entirely if there is a material and substantial change in circusmtances such as the receiving spouse’s ability to meet monthly expenses or the paying spouse’s inability to pay.
Affirmative Defenses: The paying spouse has affirmative defenses to contempt and to the violation of a condition of probation that requires the payment of court ordered spousal maintenance. A spouse who claims these affirmative defenses must properly include them in the court pleadings and prove by a preponderance of the evidence that he or she:
- lacked the ability to provide maintenance in the amount the court ordered;
- lacked property that could be sold, mortgaged, or otherwise pledged to raise the funds needed;
- attempted unsuccessfully to borrow the needed funds;
- and did not know of a source from which the money could have been borrowed or otherwise legally obtained.
How does court ordered spousal maintenance end? Court ordered spousal maintenance ends by law if:
- either the payer or the receiver dies;
- the receiver remarries; or
- the court orders it ends including when the judge finds the receiving spouse is living on a continuing basis in a permanent place of abode with another person in a dating or romantic relationship.
What if a spouse does not have enough money to pay court ordered spousal maintenance? Before a judge grants a request for spousal maintenance, the judge must take into account whether a spouse who is ordered to pay court ordered spousal maintenance actually has the financial ability to do so. If not, a judge will often consider awarding a disproportionate share of the marital assets and/or less of the debts to the eligible spouse in lieu of cash payments. Judges generally choose to order payments or award a disproportionate share of the marital estate, but not both.
Please take all of these factors into consideration if you are thinking about pursuing court ordered spousal maintenance. As in everything, you must weigh the potential benefits against the potential risks as you navigate through a divorce. For this particular issue, you must ask yourself whether the cost in terms of money, stress, and potential damage to the future relationship with your child’s co-parent of fighting for the court to force your spouse to pay court ordered maintenance will exceed the amount a judge may award or be worth it in the long run? If not, read on, because there is another kind of spousal support in Texas called “contractual alimony".
What is Contractual Alimony in Texas and How Do I Get It?
The other kind of post-divorce spousal support in Texas is “contractual alimony”. It is voluntary and paid according to an agreement between the spouses as to how much it will be, how long it will last, and what factors may cause it to change such as death of either spouse, cohabitation or remarriage of the receiving spouse, or disability or involuntary unemployment of the paying spouse. There can also be some protections for the receiving spouse such as life insurance and provisions in the event of a late payment. Spouses can negotiate what provisions to include and exclude.
There are no legal eligibility requirements for contractual alimony. If there are financial resources to do so, most commonly divorcing spouses use contractual alimony to establish a required monthly stream of income (usually in addition to child support) for a self-employed, unemployed, or underemployed spouse at the time of divorce to qualify to rent an apartment or for a mortgage loan to buy a house or to refinance the current home into his or her own name. A spouse may also pay contractual alimony to the other spouse to allow that spouse to pay the mortgage, taxes, and insurance to keep the spouse in the marital home with children for a period of time. Frequently spouses ask for assistance for a period of time from the other spouse to help with tuition or educational expenses through contractual alimony if they want or need to return to school to establish or enhance a career and contribute more toward children’s needs.
How does contractual alimony end? Like court ordered spousal maintenance, contractual alimony ends if either spouse dies. However, unlike court ordered spousal maintenance, contractual alimony does not end if the spouse receiving the alimony remarries or cohabitates with someone in a dating or romantic relationship. Instead, a spouse who wants to stop paying alimony in those situations must include those specific terms in the divorce decree.
Enforcement of Contractual Alimony: There is no guarantee for contractual alimony either. If a spouse who has agreed to pay contractual alimony fails to do so, the judge will treat the alimony agreement as a contract and apply any applicable rules of contract law to enforce the terms. Unlike for court ordered spousal maintenance, the family court may not enforce contractual alimony by contempt (fine or jail time) against a nonpaying spouse. The court treats contractual alimony as a debt the paying spouse owes the receiving spouse and Federal and state enforcement rules for collecting debt would apply. In addition, the court can only enforce an agreement for contractual alimony up to the length of time and amount the court could have awarded if it had ordered involuntary spousal maintenance.
Tip for a Spouse Seeking Contractual Alimony: Contractual alimony is by contractual agreement only. Spouses seeking contractual alimony in Texas can avoid making a costly strategic error by getting complete information about the family finances before deciding how much alimony to request from the other spouse. A spouse should make sure he or she knows how much money there is to go around before jumping the gun out of fear and demanding an unreasonably high amount.
There are consequences to making a demand for alimony that is above the paying spouse's available resources or that is outside the legal parameters for court ordered spousal maintenance (see the table above). Such demands almost always cause the other spouse not only to get mad, but often to seriously question the ability of the requesting spouse to make sound financial choices in the future. Too high a demand for contractual alimony also frequently erodes the requesting spouse’s bargaining and negotiating power. When that happens, the spouse who was feeling scared about supporting him or herself after divorce will have an even harder time feeling comfortable negotiating division of assets.
The distrustful spouse may now feel the need to protect assets and keep them in his or her control rather than to have them in the hands of the other spouse who (rightly or wrongly) may appear unable to understand the financial picture and/or to manage money well. Impulsive, premature, uninformed actions and demands can jeopardize your credibility. Outright refusal to consider alimony can have the same result. For these reasons it is important to begin the actual negotiations of the property division, child support, and alimony only after everyone has complete information, understands the law, and has explored all options. There are some other payments besides monthly spousal support that may qualify as alimony such as payments made post-divorce for a former spouse's medical expenses, housing costs (rent, utilities, mortgage, taxes, insurance, etc.), tuition, and life insurance premiums. Go to the IRS’s alimony publication to read more about these important rules and how to prevent the IRS from recapturing deducted spousal maintenance payments.
Don't forget to consider how spousal support can affect child support in Texas.
Creative divorce settlements that include alimony can keep money out of Uncle Sam’s pocket and in your family’s. Spouses seeking spousal maintenance or contractual alimony in Texas must consider the complete financial picture, and take account the tax implications and the emotions alimony brings up for everyone involved. Detente mediators help spouses have a calm, informed discussion about alimony and reach a reasonable agreement in all of their best interests.
Always consult a tax specialist who has specific knowledge about spousal support and divorce tax rules who can apply them to your particular situation. Every alimony situation is different. This material is a general overview of Texas court ordered spousal maintenance and contractual alimony and is NOT a substitute for advice from a licensed tax professional. You are welcome to add to your mediation team a neutral tax expert in the Detente resource network who can help each of you understand the rules and how you may be able to benefit from them.