Under current law, taxpayers who fork over alimony to a divorced or separated spouse can deduct the payments, while the recipient spouse owes tax on the income. However, as evidenced by a new case, Logue, TC Memo 2017-234, 11/27/17, not all payments qualify as deductible alimony.
The terms of the divorce decree must meet specific requirements spelled out in the tax law. And proposed legislation of late can change the alimony deduction.
Generally, amounts paid to a spouse or a former spouse under a divorce or separation instrument — including a divorce decree, separate maintenance decree or a written separation agreement — may be deducted as alimony on a federal tax return.
However, payments qualify as alimony only if ALL of the following requirements are met:
- The spouses don't file a joint return with each other.
- The payment is in cash (or an equivalent like checks or money orders).
- The payment is to or for a spouse or a former spouse made under a divorce or separation instrument.
- The divorce or separation instrument doesn't designate the payment as not alimony.
- The spouses aren't members of the same household when the payment is made.
- There's no liability to make the payment (in cash or property) after the death of the recipient spouse.
On the other hand, if the payment is made for child support or as a property settlement, it is NOT treated as alimony and therefore is nondeductible.
In a recent case, a couple, who were residents of Texas, married in 2006. In 2010, they separated and entered into a marital settlement agreement (MSA), drafted by the husband’s non-attorney business manager. The husband then claimed payments made under the MSA as deductible alimony.
The question that arises in this particular case is whether the payments will terminate upon the death of the recipient. This is one of the requirements for deductible alimony listed above.
To determine whether a payor has liability to continue payments after the payee's death, the Tax Court applies a three-part approach:
- It looks to see if there is an unambiguous termination provision in the applicable divorce instrument.
- If no unambiguous termination provision exists, the Court reviews whether payments would terminate at the payee's death by operation of state law.
- If state law is ambiguous as to the termination of payments upon the death of the payee, the Tax Court examines the divorce instrument to determine if the payments would terminate at the payee's death.
In applying this approach, the Tax Court found the language in the MSA didn’t contain an unambiguous provision. Next, it reviewed Texas law and found that support payments don’t terminate on the death of the payee spouse unless there is a provision in the agreement to do so. Finally, the Court examined the divorce instrument and ruled that the payments would not terminate upon death. Thus, the payments do not constitute alimony.
Be aware that the tax reform law currently working its way through Congress could repeal the alimony deduction. If the legislation is enacted, it’s likely that the deduction would still be available on 2017 tax returns for payments made this year.
About Ken Berry
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.