When couples separate or divorce, one spouse or ex-spouse is often required to make payments to the other.
The one making payments can deduct the amounts if they meet the tax-law definition of alimony. (Itemizing deductions on the tax return isn’t required.) The recipient must then report the payments as taxable income. Payments intended as alimony are often substantial, so locking in the expected deductions is important.
Because the payments must comply with several requirements, taxpayers often wind up in disputes with the IRS. Payments that don’t meet the definition of alimony generally are treated by the IRS as child support or part of a property settlement. These are personal expenses that cannot be deducted and they are tax-free income for the recipient.
Whether payments qualify as deductible alimony is determined by tax law and stringent regulations — not by what a divorce decree might say or what divorcing couples might intend. The one exception is when individuals stipulate in divorce papers that the payer won’t deduct (and the recipient won’t include in gross income) amounts that normally would qualify as deductible alimony.
For a payment to be deductible, alimony must meet the following requirements:
Requirement #1. It must be made according to a written divorce or separate maintenance decree, or a separation instrument. Here are some definitions:
- Under a separate maintenance decree, a couple is legally separated but the marriage is not legally dissolved. For federal tax purposes, this is equivalent to being divorced.
- Separation instruments settle certain marital rights before obtaining a divorce decree or a separate maintenance decree.
- Other written court orders and decrees such as temporary support orders can qualify as divorce or separation instruments. For example, payments made under temporary support orders can be deducted if all the other requirements are met.
- It must be made to or on behalf of a spouse or ex-spouse. Payments to third-parties such as attorneys and mortgage lenders also qualify when they are part of a divorce or separation agreement or requested in writing by the spouse or ex-spouse.
Requirement #2. It must be paid in cash or cash equivalents.
Requirement #3. Divorce or separation instruments cannot state, or effectively stipulate, that a payment is not alimony because it isn’t deductible or can’t be included in the recipient’s gross income.
Requirement #4. The two parties can’t live together or file a joint return after a divorce or legal separation.
Requirement #5. Fixed or deemed child support doesn’t qualify. The rules regarding what constitutes child support for this purpose are complicated. Consult with your tax adviser if your proposed divorce agreement includes payments that you want to be child support.
Requirement #6. The payer’s tax return must include the recipient’s Social Security number.
Requirement #7. If the recipient dies, the obligation ends, unless the payment is for delinquent amounts. If the divorce papers are unclear on this, state law takes over. If state law requires the payments to continue, they don’t qualify as deductible alimony.
Divorce papers should always explicitly state whether a lump-sum or recurring payment obligation will continue after a recipient dies. Failing to meet the requirement is probably the most common reason for lost alimony deductions.
Key Point: In the context of planning for deductible alimony payments, it’s not a problem if the payer’s estate is required to continue making payments after the payer’s death.
Tax Court Decisions
Three recent U.S. Tax Court cases illustrate issues that may arise when taxpayers seek to deduct alimony:
- Child Support Case. An ex-husband was required to make monthly child support payments of $8,307 and monthly alimony payments of $8,205, for a total of $16,512. However, he paid only $9,688 each month to cover both and claimed the entire amount as alimony.
Under tax law, if a combined payment is less than the full amount required, the partial payment is treated first as nondeductible child support. Any excess is deductible alimony, assuming all requirements are met.
The court allowed only $1,381 a month ($9,688 minus $8,307) to be treated as deductible alimony (Becker, T.C. Summary Opinion 2015-2).
- Future Fees Case. An ex-husband made payments to cover his ex-wife’s attorney fees following the terms of the divorce decree. He was also required to pay certain “future fees” incurred by the ex-wife. The ex-husband attempted to deduct the payments as alimony.
However, tax law stipulates that future payments can be treated as deductible alimony only if the requirement to make them ends when the recipient dies. In this case, the divorce decree didn’t state whether the requirement ended on the death of the ex-wife, and state law was inconclusive on the question.
Therefore, payments of the fees didn’t qualify as deductible alimony (Hampers, T.C. Memo 2015-27).
- Draft Divorce Agreement Case. A husband made payments to his wife following the terms of a draft of the couple’s marriage dissolution agreement. The final divorce decree was issued later in the year and didn’t call for alimony payments in that year (they were to begin in a later year).
The draft agreement didn’t qualify as a written divorce or separation instrument, because the parties didn’t agree to the terms of the draft or sign it.
Consequently, the payments were voluntary and didn’t qualify as deductible alimony (Milborn, T.C. Memo 2015-13).
Lessons for Other Taxpayers
There are several ways taxpayers can miss the boat under the rules for deductible alimony. In addition to alimony, divorces often involve other significant tax issues. One example is which parent will be entitled to various child-related tax breaks after the divorce.
For each situation, the relevant tax issues should be identified and addressed before the divorce papers are signed. Otherwise, it may be too late to obtain the best tax results.
Contact your tax adviser at the beginning of the divorce process. Waiting too long could turn out to be an expensive tax mistake you might have to live with for years.