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Did You Know...
Family Law Software can calculate child support guideline amounts in 21 states.
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Question: My spousal support present value calculation does not match yours. Why not?
Answer: Most likely, it is because we are taking account of taxes on the income earned on the spousal support payments. A financially-equivalent way of saying this is that we are using an after-tax interest rate.
The following example will illustrate both perspectives.
Consider the following situation:
The after-tax value monthly income you get from the 15,000 pre-tax payment is $15,000 * (1.0-(0.25+0.10)) = $9,750.
We want to discount this stream of payments to present value. The question is, what interest rate should we use to discount these payments?
The tendency is to use 3%, our 20-year treasury bill rate.
Discounting at 3%,we would get a present value of $1,553,426. You can duplicate this, as follows. Into Excel or Google Spreadsheet, type:
However, this approach ignores the fact that there will be tax on the income that is earned as these payments are reinvested. What you want instead is to use an after-tax interest rate to do your discounting.
In this case, the after-tax interest rate is:
Our present value calculation now gives us:
Why does our calculation give a higher present value?
Because, given the additional tax paid on the income that the spousal support earns when reinvested, a higher initial amount is needed to get the same end result.