One Ex-Spouse Void the Other’s Alimony Deduction: Tax on Alimony

Published Categorized as Federal Income Tax, Innocent Spouse Relief, Marriage & Divorce Tax, Tax, Tax Procedure
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Assume that a divorce decree says that a payment is to be made to an ex-spouse. Does that mean that it is alimony the ex-spouse has to report as income for Federal income tax purposes?  And if not, can the ex-spouse who receives the payment request a ruling from the IRS to say that the payment was not taxable to her and thereby cause the other ex-spouse to lose their alimony deduction?  The IRS addresses this in Private Letter Ruling 200720007.

Note: The tax treatment of alimony payments has changed in recent years. Under the Tax Cuts and Jobs Act of 2017, for divorces finalized after December 31, 2018, alimony payments are no longer tax-deductible for the payer or taxable income for the recipient.

Facts & Procedural History

The facts, in this case, are pretty simple. The ex-wife requested this ruling from the IRS. She requested a determination as to whether the payments she received were not “alimony.”

“Alimony” payments are generally taxable income to the recipient (in this case, the ex-wife) and tax deductible by the payor (in this case, the ex-husband). Thus, the ex-wife was seeking to avoid paying income tax on the amounts received and, as a consequence, also denying her ex-husband a deduction for the payments.

What is a Private Letter Ruling

Let’s pause to address what a private letter ruling is, as this guidance that we are discussing is a private letter ruling.

A Private Letter Ruling or PLR is a written statement issued by the IRS in response to a taxpayer’s request for guidance on a specific tax matter. It provides the taxpayer with the IRS’s opinion on how the tax laws apply to their particular situation, based on the facts presented in the request.

A PLR is specific to the taxpayer who requested it and cannot be relied upon by other taxpayers or used as precedent in future tax cases. However, a PLR can be helpful in providing guidance on how the IRS might apply tax laws to similar situations.

The IRS may issue a PLR for a variety of tax matters, such as whether a particular transaction qualifies for tax-deferred treatment, whether a particular organization qualifies for tax-exempt status, or whether a particular retirement plan complies with the tax code.

If granted, the PLR is generally attached to an amended tax return that is filed with the IRS to report the tax issue in the PLR. Not all tax issues require a return or an amended return, but when they do, this is the process.

The important aspect of PLRs for this article is that either spouse can submit a PLR request, as the ex-wife did in this case.

About Alimony Payments

Let’s consider payments made to an ex-spouse. Specifically, let’s consider payments made to an ex-spouse pursuant to a court order. These payments are usually referred to as “alimony.”

Alimony, also known as spousal support, is a court-ordered payment from one spouse to the other after a divorce or legal separation. It is designed to help the recipient spouse maintain a reasonable standard of living and to help them transition into a new, single life.

State law sets out what qualifies as alimony. This varies widely from state to state.

Alimony in Texas

In Texas, alimony is referred to as “spousal maintenance” in Texas. However, spousal maintenance is not automatic and is only awarded in certain circumstances.

In Texas, to be eligible for spousal maintenance, the requesting spouse must demonstrate that they lack sufficient property, including the property awarded in the divorce, to provide for their minimum reasonable needs, and one of the following conditions must also be met:

  • The paying spouse was convicted of or received deferred adjudication for a criminal offense that also constitutes an act of family violence within the two years preceding the filing of the divorce petition or while the divorce is pending; or
  • The requesting spouse has been married to the paying spouse for at least 10 years and lacks the ability to earn sufficient income to provide for their minimum reasonable needs.

If the court determines that spousal maintenance is appropriate, it will consider a variety of factors, including the requesting spouse’s financial resources and ability to provide for their own needs, the paying spouse’s ability to pay, and the length of the marriage, among other factors, in determining the amount and duration of spousal maintenance.

Texas law does not provide for “permanent” spousal maintenance, and the duration of the award is typically limited to a few years, depending on the circumstances.

Tax Implications of Alimony

The tax code sets out several requirements for payments to qualify as “alimony” for federal income tax purposes, including:

  1. such payment is received by, or on behalf of, a spouse under a divorce or separation instrument;
  2. the divorce or separation instrument does not designate such payment as a payment that is not includible in gross income under section 71 and not allowable as a deduction under section 215;
  3. in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee and payor are not members of the same household at the time such payment is made; and
  4. there is no liability to make such payment for any period after the death of the payee and no liability to make any payment as a substitute for such payments after the death of the payee.

Payments must meet all of these elements to qualify as “alimony” for federal income tax purposes. There have been a number of disputes involving these requirements, such as this dispute over whether a lump sum payment can qualify.

The Divorce Decree & State Law

The divorce agreement in this case indicated that the amounts paid were to qualify as “alimony” for federal income tax purposes, but the divorce agreement failed to specify that the payments were to terminate upon the death of the payee.  The question then is, are the payments “alimony” if the agreement fails to address this “death of the payee” issue?

As the IRS ruling sets out, where the agreement is silent on this issue, it is necessary to look to state law to see if the state law specifies that the requirement to make “alimony” payments terminates upon the death of the payee. The state law in this case (the state was not disclosed), did not specify that “alimony” payments were to terminate upon the payee’s death. As a result, the payments did not qualify as “alimony” for tax purposes, despite the express provision in the divorce decree.

The Takeaway

Alimony or spousal support has unique tax treatment. This includes providing a deduction for the party who pays the alimony. This deduction is only available if the specific requirements for payments to qualify as “alimony” for federal income tax purposes are met. As this PLR shows, one of the spouses can request the IRS to rule on whether a payment is alimony. This can have the effect of denying the deduction to one spouse and preventing the other spouse from picking the item up as income for tax purposes. The spouses can also request innocent spouse relief, which can also be used strategically against the IRS or even against the ex-spouse.

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