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U.S. Tax Court Rules Against Texas Payor in Complex Alimony Deduction Case

How are alimony payments treated from a tax perspective?

For payors of alimony, there may be special tax considerations applicable to the monthly payments mandated by court order. As a general principle, alimony payments are deductible from the payor’s annual income provided several conditions are met, including:

• The payments are mandated by court order or provided for in a written separation agreement;
• Spouses are not filing a joint tax return;
• The payor pays in cash directly to the other spouse;
• Liability to continue payments ceases upon the death of the recipient; and
• The payment is not considered a child support payment or property settlement agreement.

Moreover, non-deductible support payments include voluntary gifts/support, payments allocated to keep up the recipient’s property, and any noncash asset transfers.

Tax court considers deductibility of wages garnished after death of recipient

In May, 2015, the U.S. Tax Court considered a dispute between the IRS and an individual taxpayer regarding the deductibility of alimony payments that were being automatically withheld from obligor’s wages each pay period. Under typical circumstances, this arrangement would be considered a valid method for providing support and would be undoubtedly deductible from the payor’s annual adjusted gross income.

However, in this case, the wage garnishment took place as a result of a state-sanctioned action for support arrears, and the obligor owed over $64,000 in back alimony payments. Accordingly, he was set up on a payment plan wherein the amount would be steadily deducted over time until the debt was repaid. Contrary to the IRS’s requirements, the terms of the payment plan did not allow for a suspension of liability upon the death of the recipient, and accordingly did not meet the criteria for deductibility described above. Consequently, the entirety of the obligor’s payments will not be deductible on his tax return, and the payments will continue even in the event of the recipient’s death.

If you have a question about alimony or the tax consequences of divorce, please do not hesitate to contact the Austin, Texas divorce attorneys at Stinson Moyle right away! You can reach us by calling (512) 948-3688 today.