An alimony buyout, often referred to as lump sum alimony, is an upfront, one-time payment to the recipient party, which is less than the equivalent of the present day value of the payments over time.
In most cases, the interests of persons asked to pay spousal maintenance are better served by offering an immediate buyout of alimony in return for a waiver that would preclude the court from modifying spousal support in the future.
This buy-out may occur as part of a property settlement that favors the party seeking maintenance.
To determine what amount to offer or accept as an alimony buyout, it is important to consider the present value of the asset and the tax consequences.
Calculating An Alimony Buyout
Present value refers to the value of a dollar today as compared to the value at some point in the future. Remember, a dollar paid today is more valuable than a dollar received next year or even next week since the money properly invested would gain interest over that period.
As a direct result, a buyout of alimony will always be less than the total value of the spousal maintenance paid over time.
If the spousal support is to be paid out for an indefinite period of time, there may be no way to calculate a value to “buy out” the remaining amount of the spousal support.
However, if spousal support was ordered for a definite period of time or was agreed to in a property settlement agreement for a limited amount of time, you may be able to negotiate a lump sum payment with the opposing party to buy out the remainder of the spousal support owed.
Typically, this would be an amount less than the total of the monthly amount since the money would be provided up front and would have the opportunity to grow through investments or interest if it is paid up front.
The exact amount for an alimony buyout would involve an agreement between the parties, which should be in writing and submitted to the court for approval.
Is An Alimony Buyout Tax Deductible?
Maintenance payments are generally tax deductible to the payer and taxable to the payee. If your divorce decree called for alimony buyout, however, the payment is likely not tax deductible to you or taxable to your ex-wife.
This is because alimony buyouts are typically a reduced payment amount that takes into consideration the present day value of maintenance payments over time including the tax consequences to both parties.