Why Gross Income Is Used to Calculate Alimony

  Reviewed by: Ryan Cockerham, CISI Capital Markets and Corporate Finance      Updated November 17, 2018
  Written by: Kathy Adams McIntosh
Why Gross Income Is Used to Calculate Alimony

When a couple divorces, several things need to be considered. If the couple are raising minor children, they need to decide on custody arrangements and child support payments. The assets acquired during the marriage need to be divided between the two spouses. In some divorces, one spouse pays alimony to the other. The court uses the paying spouse’s gross income to calculate the amount of alimony payments.

Tips

  • Gross income is used as a standard of measure for alimony payments due to the fact that an individual could manipulate the basis for alimony payments through excessive deductions. This, in turn, would create an artificially lowered net income.

Exploring Alimony Payments

Alimony refers to the money paid from one individual to his former spouse. The courts award alimony when the former spouse supported the marriage in nonfinancial ways by performing household chores or raising children. The former spouse generated no income for the household and neglected developing her career during this time. Alimony provides income to her for a period of time, allowing her time to develop her own financial resources.

Evaluating Gross Income

Gross income refers to the total income earned by an individual. This includes wages, self-employment income or investment earnings. Any deductions from gross income, such as taxes, insurance or retirement contributions are used to calculate the net income. Gross income remains unchanged.

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Assessing Standard of Living

Throughout the marriage, the couple experienced a particular standard of living. Divorce leaves the nonworking spouse with little income to maintain that standard of living. Alimony serves to help the spouse maintain a comparable standard of living. Alimony calculation uses gross income because this represents the standard of living the parties lived prior to the divorce.

Identifying Optional Deductions

The alimony calculation uses gross income because many deductions from gross pay are optional. Retirement contributions, savings plans or stock purchase plans all represent deductions employees make from gross income. The individual decides whether to make these deductions and how much to deduct. These deductions are optional and the employee could potentially manipulate the income amount by deducing the entire amount. The court calculates alimony using gross income to prevent the individual from manipulating the basis for the alimony payments. Additionally, if a paying spouse's taxes or benefits change and more is taken out, the receiving spouse won't be penalized for something that is outside her control.

Tax Liability Transfers

The tax liability for the alimony payment transfers to the recipient. The taxable income of the payer decreases by the amount of alimony paid. The court uses gross income to calculate the alimony payment because this correlates with the income measurement used for the tax calculation.

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