Alimony is Not Always Tax Deductible

 Posted on June 06, 2014 in Child Custody

Under Section 215(a) of the Internal Revenue Service Code (IRC), the definition of spousal support for tax purposes is any cash payment which falls under the following:

• Spouses do not file joint income tax returns with each other;
• The divorce or written separation agreement does not state that the payment is not alimony;
• If legally separated or divorced, the spouses do not live in the same household when payments are made;
• There is no liability to make the payment (in cash or property) upon the death of the spouse receiving the spousal support;
• The payments are not treated as child support or a property settlement.

The IRS does allow the deduction of spousal support payments. However, in a recent case before the U.S. Tax Court, a judge ruled that a man was not allowed to take the alimony payments he made to his ex-wife as deductions. The court based their decision on what the IRS refers to as "child-related contingency."

The couple's divorce decree specified the alimony or spousal support payments would end under one of the following conditions:

• The graduation from high school of the couple's youngest child;
• The remarriage of the ex-wife; or
• The death of the ex-wife.

The IRC states that if there is any type of contingencies involving a child, then the funds are classified as funds for the child and not classified as spousal support. Therefore, the funds are not tax deductible.

In this case, the ex-husband was also paying child support and the divorce settlement agreement stated that the spousal support payments were tax deductible for him and taxable for the ex-wife. The husband's attorney argued to the Tax Court that the high school graduation date was only "intended as a mere reference point for the termination of spousal support."

The court disagreed, stating the intent "holds no value" and declared the payments were actually child support payments and not spousal support payments.

This case exemplifies how critical the wording is in any divorce settlement agreement is and to ensure the wording will not leave either party unprotected or liable in the future. If you are considering a divorce, contact an experienced Round Rock family law attorney to ensure you are fully protected in divorce negotiations.