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Alimony Impact on Disposable Income


 

Manual Calculation and Workaround for Alimony Impact on Disposable Income


Question: Would it be possible to find a method to manually calculate using the figures provided in the ledger, or is there a workaround that can be programmed into the software to address the issue of reducing the client's gross income for tax purposes, particularly affecting their Old Age Security (OAS), given that the client is not yet receiving Canada Pension Plan (CPP) or OAS and there is no Defined Benefit (DB) pension?




Answer: Unfortunately, there is no direct workaround within the Milestones Retirement Insights ledger to integrate an alimony payment into the plan. However, here is a manual method to determine the disposable income after paying alimony:

Example:

  1. Suppose the client's gross taxable income is $100,000 and disposable income is $70,000 before paying alimony, and they pay $20,000 in alimony.

  2. Use an online tax calculator (e.g., EY Tax Calculators) and input two values: $100,000 (gross taxable income) and $80,000 (gross taxable income minus alimony). For an Ontario resident, the taxes payable would be $23,454 and $16,561, respectively.

  3. Calculate the disposable income after alimony using:

Suppose the client's gross taxable income is $100,000 and disposable income is $70,000 in a given year before paying alimony and they pay $20,000 in alimony. 

Go to  https://www.eytaxcalculators.com/en/2021-personal-tax-calculator.html and input two values $100,000 (gross taxable income) and $80,000 (gross taxable income minus alimony) and read the taxes payable result for each. Assuming they are an Ontario resident we get $23,454 and $16,561 in taxes payable respectively. 

We can now calculate the disposable income after alimony using the following: [Post-Alimony Disposable Income] = [Pre-Alimony Disposable Income] - [Alimony] + [Taxes Payable Difference]

In this case we get  [Post-Alimony Disposable Income] = $70,000 - $20,000 + ($23,454 - $16,561) = $56,893


It's a good approximation to bring forward if gross taxable income is relatively stable throughout the lifetime of the plan. This method provides an approximation for a single year and can be useful if the gross taxable income remains stable throughout the plan.


Alternatively, if the annual alimony payment is less than the sum of non-OAS taxable income streams (e.g., CPP + DB Pension + Taxable Custom Incomes), reduce those streams by the alimony amount. For example, if the alimony is $10,000 per year and the user receives $15,000 per year from CPP, enter $5,000 ($15,000 - $10,000) for CPP. If the alimony exceeds $15,000 per year, this approach only works if additional income sources (e.g., DB Pension or taxable custom income) are available to reduce.


Keywords:

Alimony Impact, Disposable Income Calculation, Tax Optimization


 

For more information or to clarify any questions about using the Milestones Retirement Insights tool for comprehensive retirement income planning, reach out to us at info@milestones-retirement.com 

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