It has been said over and over again that there are no formula’s to determine alimony.  As I have blogged in the past, other than one legal malpractice referencing the formula or “rule of thumb”, virtually every time the Appellate Division gets a case where a formula was used, the case is reversed because the use of formulas is not permitted.  Rather, courts are required to analyze the statutory factors which are as follows;

 (1)The actual need and ability of the parties to pay;

(2)The duration of the marriage or civil union;

(3)The age, physical and emotional health of the parties;

(4)The standard of living established in the marriage or civil union and the likelihood that each party can maintain a reasonably comparable standard of living, with neither party having a greater entitlement to that standard of living than the other;

(5)The earning capacities, educational levels, vocational skills, and employability of the parties;

(6)The length of absence from the job market of the party seeking maintenance;

(7)The parental responsibilities for the children;

(8)The time and expense necessary to acquire sufficient education or training to enable the party seeking maintenance to find appropriate employment, the availability of the training and employment, and the opportunity for future acquisitions of capital assets and income;

(9)The history of the financial or non-financial contributions to the marriage or civil union by each party including contributions to the care and education of the children and interruption of personal careers or educational opportunities;

(10) The equitable distribution of property ordered and any payouts on equitable distribution, directly or indirectly, out of current income, to the extent this consideration is reasonable, just and fair;

(11) The income available to either party through investment of any assets held by that party;

(12) The tax treatment and consequences to both parties of any alimony award, including the designation of all or a portion of the payment as a non-taxable payment;

(13) The nature, amount, and length of pendente lite support paid, if any; and

(14) Any other factors which the court may deem relevant.

That said, the rule of thumb, or as I have called it, the “dirty little secret”, still exists in practice.  Prior to the 2019 change in the taxability/deductability of alimony that was part of the Tax Cut and Jobs Act, you would commonly see the rule of thumb being applied as one-third of the difference between the payer’s income and the recipient’s income (or imputed income), though supposedly a lower percentage was used in South Jersey for some unknown reason.  That said, and by way of example, if the payer earned $350,000 and the recipient earned $50,000, the alimony under the “rule of thumb” was $100,000 per year.

Query how any rule of thumb squares with factor 4, “The standard of living established in the marriage or civil union and the likelihood that each party can maintain a reasonably comparable standard of living, with neither party having a greater entitlement to that standard of living than the other.”  Necessarily, the payer will have the ability to have the greater lifestyle than the recipient because they will have more net after tax dollars, whether the alimony is taxable, or not.  When the parties have no children or the children are grown, the results of the “rule of thumb look more stark when juxtaposed against this factor.  When there is child support paid to the recipient, it would not be uncommon for the parties’ net after tax cash flows to look similar – ignoring for a moment that on the payer’s side, that cash flow is meant to support one person, while on the recipient side, the cash flow would be to support the recipient and the children.

Aside from the tax issue addressed herein (and people used to say 1/3 for the husband, 1/3 for the wife and 1/3 for the government – though the numbers never actually worked that way), what is the justification for giving the income earner more than the recipient in light of Crews v. Crews (the seminal Supreme Court case addressing marital lifestyle) and factor #4?  For more than two decades, I have heard things like “you have to give the guy a reason to get out of bed in the morning” or “he’s the one earning the money” as reasons given by judges and mediators.  Additionally, now that the issue of a “savings component” of alimony is more of a consideration in high income/high asset cases after the Lombardi case in 2016, when combined with Crews and factor #4, shouldn’t the recipient be arguing for an alimony award that puts the parties in equipoise?  That said, despite that statement in the statute, there is no case at this point that stands for the proposition of income equalization – though I have heard the argument since factor #4 was amended in 2014.

But back to these thorny rules of thumb.  Since January 1, 2019, when the changes in the tax code began to affect alimony making it no longer deductible to the payer or includable in the recipient’s income, practitioners began clamoring for the new “rule of thumb.”  I have heard, 22%, 25%, 27%, somewhere between 22% and 27%, and even as low as 20% of the difference between the incomes (or imputed income).  I then began to hear that the higher the income, the lower the percentage because of the higher tax rates.  At first, that seemed plausible, but when put to the test – especially when compared to factor 4 – that myth can be debunked.

Lets start with the same incomes from above – $350,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $75,000 per year; using 22%, it is $66,000.  At 25%, the net after tax split is 55%-45%; at 22%, it is 58%-42%.  In this case at 22%, the payor has $148,644 net after tax cash flow per year and the recipient has $106,668 or $41,976 less ($3,498 per month).  At 25%, the difference is only approximately $24,000 ($2,000 per month).

If we use $500,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $112,500 per year; using 22%, it is $99,000.  At 25%, the net after tax split is still 55%-45%; at 22%, it goes to 59%-41%.  In this case at 22%, the payor has $199,056 net after tax cash flow per year and the recipient has $139,668 or $59,388 less ($4,949 per month).  At 25%, the difference is only approximately $32,388 ($2,699  per month).

If we use $750,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $175,000 per year; using 22%, it is $154,000.  At 25%, the net after tax split is still 54%-46%; at 22%, the spread widens to 58%-42%.  In this case at 22%, the payor has $273,072 net after tax cash flow per year and the recipient has $194,664 or $78,408 less ($6,534 per month).  At 25%, the difference is only approximately $36,408 ($3,034 per month).

If we use $1,000,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $237,500 per year; using 22%, it is $209,000.  At 25%, the net after tax split moves to 53%-47%; at 22%, it is 58%-42%.   However, in this case at 22%, the payor has $345,744 net after tax cash flow per year and the recipient has $249,672 or $96,072 less ($8,006 per month).  At 25%, the difference is only approximately $39,072 ($3,256 per month).

If we use $1,250,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $300,000 per year; using 22%, it is $264,000.  At 25%, the net after tax split stays at 53%-47%; at 22%, it stays at 58%-42%.  However, in this case at 22%, the payor has $418,416 net after tax cash flow per year and the recipient has $304,668 or $113,748 less ($9,479 per month).  At 25%, the difference is only approximately $41,748 ($3,479 per month).

If we use $1,500,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $362,500 per year; using 22%, it is $319,000.  At 25%, the net after tax split stays at 53%-47%; at 22%, it stays at 58%-42%.  However, in this case at 22%, the payor has $481,088 net after tax cash flow per year and the recipient has $359,664 or $121,424 less ($10,119 per month).  At 25%, the difference is only $44,424 ($3,702 per month).

If we use $2,000,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $487,500 per year; using 22%, it is $429,000.  At 25%, the net after tax split goes to 52%-48%; at 22%, it stays at 58%-42%.  However, in this case at 22%, the payor has $636,672 net after tax cash flow per year and the recipient has $469,668 or $167,000 less ($13,917 per month).  At 25%, the difference is only $49,764 ($4,147 per month).

So it seems clear that the rationale that the higher the income, then lower the percentage for the rule of thumb doesn’t really add up.  One reason is that the marginal tax rate is 35$ for income between $207,151 and $518,400.  After $518,400, it goes up to 37%.  That said, virtually all of the above scenarios, basically everything $518,400 and above fall into the highest tax bracket.  I think that most people who propose a variable rule of thumb wouldn’t apply the lower rate to $500,000, $600,000, $700,000 – maybe even not until income more than $1,000,000.  (And yes I understand that there may be a difference when discussing effective rates but query whether it is enough to justify using a lower percentage for the “rule of thumb.”)

Also, looking at the differences from a percentage basis is misleading as the income goes up.  While the use a 22% rule of thumb provided a consistent 58%-42% across the board (I did not know this until doing the calculations for this blog, and quite frankly was surprised by it and it almost blew my theory), looking at the percentages is misleading.  You actually have to look at the net after tax dollars to gauge the fairness or unfairness – especially if factor #4 is really a consideration.  Again, what the courts and practitioners should do is actually analyze the alimony factors.  But if people are still going to use these “rules of thumb” as a guide, care should be taken to show where the net after tax cash flows shake out for each party to see if result of the formula is fair and resembles in some way the goals and objectives of the alimony statute.