Taxpayer asks:
Hello,
I went to court last week and my attorney and ex-wife's attorney wrote a settlement that has me paying her approximately $83,000 in spousal support over the next 5 years. In the declaration, it states that support to wife is tax-free. I do not know tax law and didn't understand how the court could make that determination, but I didn't think it would affect me and my attorney advised me that this would be the best I would get. Not only did I/do I feel he threw me under the bus with the whole deal, but he did not explain that part to me. It does not state that husband cannot write it off, as I would never have signed that, but it does day it is non-taxable to wife. Does that imply that I am agreeing to me not being able to use it as a deduction? Thank you.
Taxgirl says:
You're absolutely right to wonder whether that phrase has tax consequences to you. The Tax Code is generally written so that items of income match items of deduction.
In the case of alimony, it's deducted on a federal form 1040 at line 31 by the payor:
And it's picked up as income by the recipient which is the "match" of income to deduction. That's why the form asks for the Social Security number of the recipient.
The fact that it's not required to be picked up by the recipient as income in your case - and that fact is written into the order - makes me suspect that it's not actually alimony. Remember, all payments made to a spouse or former spouse aren't necessarily alimony.
To qualify as alimony for purposes of a federal income tax deduction, you must be divorced or under a separation order. You cannot be living under the same roof as your spouse/ex spouse when you make the payments (unless you meet a court-ordered exception), nor can you claim alimony in a year that you file a joint tax return with your spouse/soon to be ex spouse.
Alimony payments must be "to or for a spouse or former spouse under a divorce or separation instrument." That includes an official decree of divorce with mandatory support payments, a written separation agreement requiring such payments or any other type of court order requiring you to support your spouse. The agreement or order does not have to be permanent: temporary decrees, interlocutory (not final) decrees, decrees of alimony pendente lite (awaiting a final decree "during the proceedings") all count.
Alimony payments must be in cash (or checks/money orders) and there must be no obligation to make any payment in cash or property after the death of your spouse or former spouse.
The obligation to pay alimony must not be voluntary. The IRS and you may have a different understanding as to what constitutes "voluntary." Here’s a tip: if you have an official order or agreement, as mentioned above, it’s not voluntary. But if you simply have an understanding, you feel morally compelled to make payments because you screwed things up or your ex-spouse is demanding that you pay something and just want to shut him or her up, that doesn't count.
The payments must not be child support. That's important since child support is tax neutral: it's neither deductible to the payer nor income to the recipient. The characterization of payments isn't always up to you: if you are behind on child support, the IRS will characterize payments made to your spouse/ex spouse as child support first, and not as alimony, no matter what your agreement says. That means you lose the deduction.
So far, this probably seems like stuff you already know.
But here's where things get tricky. Payments that are considered property settlements are not considered alimony. Ditto for payments or services to keep up your property - like mortgage payments for a house or other property you may still own. For example, if your ex has the ability to live rent-free in a home that you are responsible to keep up (including payments for mortgage, real estate taxes, insurance, and repairs), those payments aren’t alimony. And the value of the rent that your ex isn't paying to live there? Also not alimony.
What if you didn't have the cash to pay out a portion of a property settlement and ended up writing the equivalent of an IOU? Not alimony. Again, property settlements aren't considered alimony, whether in a lump-sum or installments. Promises to pay, promissory notes, or regular payment schedules don't change that.
You didn't indicate where you live but payments that are your spouse's part of community property income are also not considered alimony. That could come into play if you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin. State law determines whether your income is separate or community income in those states.
Finally, there's a catch-all that says that it's only alimony if the divorce or separation instrument doesn't say it's not alimony. It sounds like that might be the case here - especially if the provision was negotiated as part of the divorce (for example, your attorney made a deal that you'd pay $3,000/month instead of $4,000/month on the condition that it would not be treated as alimony).
It's hard to know exactly what's going on without seeing the settlement agreement. You need to be sure that you've read those documents. Remember, it's your signature and not your lawyer's on that agreement so you want to make sure that you've read it. Never sign anything without knowing exactly what you're signing and what the specific provisions in the document mean for you.
Here's what I would do. I would dial up your divorce lawyer and ask specific questions about the payments including whether they are one of those disqualifying payments. Make a list of questions to ask before you call (or make an appointment) so that you completely understand what you're paying and why, as well as what it means for your financial and tax bottom lines.
If your lawyer doesn't know tax law, consider hiring a tax professional to review your settlement or divorce agreement to make sure that you understand the tax provisions. While you cannot deduct fees and costs to get a divorce, you may be able to deduct legal fees paid for tax advice related to a divorce and alimony.
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Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here's how to "ask the taxgirl."
