When Are Support Payments Tax Deductible?
Many family law cases, whether resolved through court order or a separation agreement, include payments from one party to the other. Typically these are separated out into different actions – spousal support, child support, dividing bank accounts, or even paying the other party’s expenses. What you transfer to your spouse, or receive from your spouse, can make a huge difference when it comes to your annual income taxes.
The Internal Revenue Service (IRS) rule addressing this situation is on the surface quite clear. In Publication 504, the IRS states that alimony payments are deductible from income by the person paying alimony, and must be included as income by the spouse receiving the alimony payments. Looking up alimony in the dictionary will tell you that alimony is the same thing as spousal support, but unfortunately it is not that easy. The IRS for tax purposes has their own definition of alimony, and some of the payments that fall under their definition of alimony may come as a surprise.
For a payment to qualify as alimony for tax purposes, (a) the payment must be in cash (including check or money order, and excluding property transfers); (b) the payment must not be designated as a non-alimony payment; (c) the parties must not be members of the same household; (d) there must be no liability to make the payment after the death of the receiving party; and (e) the payment must not be treated as child support. This definition clearly includes spousal support as alimony and clearly excludes child support and division of funds in a joint bank account. But what about paying the other party’s expenses?
The IRS says cash payments to a third party on behalf of your spouse can be alimony if they meet the alimony requirements above. An obligation to make your spouse’s car payment, or continue paying your spouse’s medical expenses, if made in cash to the lender or the doctor, would be alimony. The paying party would be within their rights to deduct those payments from their gross income at tax time, and the receiving party would be required to include them in his or her income. Potential discrepancies between former spouses’ tax returns could turn up in an audit and cause serious problems with one or both party’s returns.
Divorcing spouses do not always think of these payments to third parties as alimony because the payments are not labeled as such– remember the dictionary definition of alimony as being simply spousal support. Terms about payment of car loans or medical bills are typically not found in the spousal support section of a separation agreement or divorce decree, but as far as the IRS is concerned they are all alimony (if the above requirements are met).
The divorce lawyers at Livesay & Myers, P.C., are experienced with these and other alimony issues, and routinely help individuals maximize their tax savings or minimize their tax liabilities in spousal support cases. We represent clients in Fairfax, Alexandria, Arlington, Manassas, Woodbridge, Prince William County, Fredericksburg, Spotsylvania, Stafford, and throughout Northern Virginia. Contact us to schedule a consultation today.