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.