Not all of a client’s alimony payments qualify as deductible, but a recent Tax Court case ruled that you can include student loan payments.
In a new case, Vanderhal, TC Summ. Op. 2018-41, 9/5/18, the taxpayer was able to claim an alimony deduction for payments made on a former spouse’s student loan debt, which is especially significant in light of the crackdown on alimony deductions in the Tax Cuts and Jobs Act (TCJA).
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. Accordingly, those payments are then taxable to the recipient. 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 the new case, a couple residing in California were divorced in 2011. The divorce decree addressed items routinely found in such documents, such as spousal support and the division of property.
According to the divorce decree, the couple also entered into an equitable agreement settling all issues on the division and distribution of assets and debts. This included a reference to a Sallie Mae student loan account relating to the taxpayer’s former spouse.
To determine if payments constitute “alimony,” the Tax Court must examine the terms of the divorce decree and agreement. It concluded that the taxpayer was responsible for the payment on his ex-wide’s student loan debt and that his payments should be treated as deductible alimony.
Under the TCJA, the deduction for alimony payments and the corresponding rule requiring inclusion of income for recipients is repealed. Unlike most other TCJA changes for individual taxpayers that are effective for 2018 through 2025, this provision is permanent.
But the repeal first takes effect for agreements entered into after 2018. Also, alimony deductions may still be available for existing agreements modified after 2018 (unless the agreement states otherwise).
This could be an important consideration for some of your clients who are already divorced or currently engaged in divorce proceedings. The divorce decree may be structured to provide certain tax results based on negotiations and the intent of the respective parties.
In short, be sure to provide the tax assistance your clients need during these difficult times.
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...