*NOTE: THIS PAGE MAY NOT BE APPLICABLE DUE TO THE 2019 TAX REFORM ACT – IT IS IMPORTANT TO CONSULT LEGAL AND TAX ADVICE IF YOU HAVE A SPECIFIC QUESTION*
Deductibility of Spousal Support (Alimony) Payments – Cautionary Advice
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The deductibility of spousal support (also called “alimony”) is an important but often overlooked issue. A recent United State Tax Court decision (TC Memo 2015-80) provides an extremely interesting holding concerning alimony arrearages payments. The deductibility of alimony and this recent Tax Court Ruling are discussed below.
Many divorced spouses understand the general rule that spousal support payments are tax deductible to the person that issues payment, and taxable income to the recipient. However, there are more factors to this rule that must be heeded. The Internal Revenue Service (IRS) provides insight into the deductibility of spousal support payments in “Topic 452“, which can be accessed here. The IRS provides seven requirements that must be met before alimony payments are deductible, which include:
- You and your spouse or former spouse do not file a joint return with each other
- You pay in cash (including checks or money orders)
- The payment is received by (or on behalf of) your spouse or former spouse
- The divorce or separate maintenance decree or written separation agreement does not say the payment is not alimony
- If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment
- You have no liability to make the payment (in cash or property) after the death of your spouse or former spouse, and
- Your payment is not treated as child support or a property settlement.
The issue of whether a payment is not treated as a property settlement is not covered in this short article due to the extremely complicated nature of the IRS “recapture” regulations. For more information on this issue, contact our office. Regarding the other requirements, they seem relatively straightforward on paper but in practice the issue of whether certain payments are deductible becomes much more grey. For example, suppose that spouses maintain separate households after they separate but have a “nesting arrangement” to share custody of children (this is where the spouses trade off residing part of the week or month in the family residence so the children’s lives are not interrupted by a divorce or separation). In that case, are alimony payments deductible? What if the support obligor pays in cash but the recipient claims that he or she never received the payment? Obviously, there would be no record of those payments.
Deductibility of Spousal Support Arrearage Payments
The recent ruling by the United States Tax Court in its Memo 2015-80 provides a very interesting and alarming insight into whether lump sum payment toward alimony arrearages are deductible to the obligor and taxable to the recipient. In the 2015-80 case, the Tax Court found that lump sum payments toward alimony arrearages, when the arrearages were calculated into a judgment by the Family Court in Maryland, are not deductible. In short, the reason for this ruling is based in the premise that if a support recipient has to go back to court and obtain a judgment for the payment of arrears, any payments toward that judgment do not meet one of the seven requirements of deductibility. Specifically, money judgments (which simply means that one person owes another person a specific amount of money) survive the death of the parties and the money owed is still due and payable even after the obligor or recipient die. Normally, spousal support payments end upon the death of either party (California statutory law provides this rule).
This recent Tax Court ruling could be great news for anyone owed a significant sum of alimony or spousal support.
For more information about collection of spousal support, click here.