When are Divorce Payments Deductible Income?


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Marriage & Divorce

When are Divorce Payments Deductible/Income?

By: A.J. Cook

If it takes planning to pull off a wedding, pulling one apart requires even more.

It takes knowledge of tax rules and how they apply to divorce documents. This is important, for example, because, if payments between former spouses are alimony, they are deductible by paying spouse and income to receiving spouse. If these are child support, however, they are neither deductible nor income.

These are some of the requirements for qualification as alimony.

The payments are in cash, not property.
The instrument does not designate non-alimony treatment.
The payments are made under a divorce or written separation agreement.
The payments stop upon the death of the recipient spouse. For example, husband agrees to pay wife, or her estate if she dies, $5,000 each year for five years. The payments don't qualify as alimony because they don't stop at wife's death.
The payments do not qualify as child support. If payments are tied to an event related to the child, they will be child support. Donald Fosberg of Farmington, Conn. agreed to pay ex-wife, Ingrid, $7,800 a year until she remarried or until their youngest child reached 18. These payments are child support, not alimony because they are related to the child.

These requirements cannot be circumvented. Labeling payments alimony in the divorce decree will not make them deductible. Tax law controls.

This rule isn't limited to alimony. In one case an ex- husband deducted interest and property taxes because the decree said he could. It said Vivian Diez-Arguelles could live in the couple's Wheaton, Ill., home until it was sold. She was to pay mortgage interest and property taxes, but her ex, Ernesto, would get the deductions. No, it doesn't work that way. The deductions, because of tax law, go to the person who was obligated to pay and did. Vivien gets them.

The IRS ignores tax mandates and labels in divorce documents.

The Moral: A tax burden by any other name is still a tax burden.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

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