How to determine whether payment of money to a spouse post-divorce qualifies as alimony under Internal Revenue Code §71 for tax-deduction purposes – Part 1.

Christopher Melcher provides a useful article on the tax-deductibility of alimony in this month’s Family Law Journal of the American Bar Association: Make the Tax Code Your Friend – and Alimony More Palatable. He points to eight simply rules to determine if payment of money to a former spouse post-divorce qualifies as tax-deductible alimony:

Rule 0: The label doesn’t usually matter.

Whether or not the payment is called “alimony” in the court order or something else does not affect its treatment as alimony under the tax laws. Likewise, a payment labeled as “alimony” may not qualify if the rules are not met. 

One exception to this rule is that payments labeled as “child support” cannot be considered alimony.

Rule 1: The payment must be made in “cash”.

Alimony cannot be paid in exchange for services, property, an I.O.U., or for the use of property. Treas. Reg. §1.71-1T. Of course, checks or other methods of paying “cash” are accepted.

Rule 2: The payment must be received by or on behalf of a spouse or former spouse.

The payment does not have to be made directly to the spouse or former spouse. It can be paid to a third party for the benefit of the spouse. For example, cash payment of rent, mortgage, tax, or tuition liabilities of the spouse or former spouse made under the terms of the divorce decree will qualify as alimony. Treas. Reg. §1.7-1T, Q&A, A-6.

Melcher says the tricky part of these arrangements is to make sure that the payor does not benefit from the payment; otherwise the payment will not qualify as alimony. Sometimes making payments on behalf of the spouse, such as mortgage payments, can implicate more than one set of tax rules and create some confusion. If the house and the mortgage are in the name of the payor, the payor cannot take an alimony deduction for paying the mortgage even if the payee has exclusive possession. “Any payments to maintain property owned by the payor spouse and used by the payee spouse (including mortgage payments, real estate taxes, and insurance premiums) are not payments on behalf of a spouse, even if those payments are made pursuant to the terms of the divorce or separation instruments. Treas. Reg. §1.71-1T; Q&A A-6.

Simple enough: the payor is responsible for making those payments as the owner of the property or debtor under the mortgage and, thus, payment of those obligations cannot be treated as alimony to his or her spouse or former spouse.

On the other hand, where the payee owns the house and the mortgage is in his or her name. Since the alimony recipient is solely obligated for paying the mortgage, the parties can agree that his or her alimony will be paid to the mortgage company. The payee spouse can take an itemized deduction for the mortgage interest and property taxes paid, since these were made with his or her alimony money. IRS Publ. 504, p. 13 (2008).

If the spouses jointly own the residence and mortgage and the alimony order says that one spouse will pay the mortgage as alimony to the other spouse, the IRS will only recognize one-half of the payment as alimony. IRS Publ. 504, p. 12 (2008).

For payments of property taxes and home insurance in the form of alimony on a residence held in joint tenancy, none of the property tax or insurance payments qualify as alimony, but the payor spouse can take an itemized deduction for all of the property taxes. IRS Publ. 504, p. 12 Table 5 (2008).

Sometimes, spouses agree to require life insurance as a form of security for the loss of alimony if the payor dies. If the divorce agreement requires the payor spouse to maintain life insurance for the supported spouse as security for alimony, the premiums are deductible if the supported spouse is both the owner and irrevocable beneficiary of the policy and has all incidents of ownership under the policy. Stevens v. Comm’r, (1971) 439 F.2d 69; Rev. Rul. 57-125; Rev. Rul. 70-218; Treas. Reg. §1.71-1T, Q&A, A-6.

For an overview of Texas alimony laws, please see our website O’Neil & Attorneys.

For additional information about alimony and maintenance in Texas, see the following blog posts here on the Dallas Texas Divorce Law Blog:

 

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Michelle May O’Neil has 27 years’ experience representing small business owners, professionals, and individuals in litigation related to family law matters such as divorce, child custody, and complex property division. Described by one lawyer as “a lethal combination of sweet-and-salty”, Ms. O’Neil exudes…

Michelle May O’Neil has 27 years’ experience representing small business owners, professionals, and individuals in litigation related to family law matters such as divorce, child custody, and complex property division. Described by one lawyer as “a lethal combination of sweet-and-salty”, Ms. O’Neil exudes genuine compassion for her client’s difficulties, yet she can be relentless when in pursuit of a client’s goals. One judge said of Ms. O’Neil, “She cannot be out-gunned, out-briefed, or out-lawyered!”

Family Law Specialist

Ms. O’Neil became a board-certified family law specialist by the Texas Board of Legal Specialization in 1997 and has maintained her certification since that time. While representing clients in litigation before the trial court is an important part of her practice, Ms. O’Neil also handles appellate matters in the trial court, courts of appeals and Texas Supreme Court. Lawyers frequently consult with Ms. O’Neil on their litigation cases about specialized legal issues requiring particularized attention both at the trial court and appellate levels. This gives her a unique perspective and depth of perception that benefits both her litigation and appellate clients.

Top Lawyers in Texas and America

Ms. O’Neil has been named to the list of Texas SuperLawyers for many years, 2011-2018, a peer-voted honor given to only about 5% of the lawyers in the state of Texas. In 2014-2018, Ms. O’Neil received the special honor of being named by Texas SuperLawyers as one of the Top 50 Women Lawyers in Texas, Top 100 Lawyers in Texas, and Top 100 Lawyers in DFW. She was named one of the Best Lawyers in America for 2016 and received an “A-V” peer review rating by Martindale-Hubbell Legal Directories for the highest quality legal ability and ethical standards.

Author and Speaker

A noted author, Ms. O’Neil released her second book Basics of Texas Divorce Law in November 2010, with a second edition released in 2013, and a third edition expected in 2015.  Her first book, All About Texas Law and Kids, was published in September 2009 by Texas Lawyer Press. In 2012, Ms. O’Neil co-authored the booklets What You Need To Know About Common Law Marriage In Texas and Social Study Evaluations.  The State Bar of Texas and other providers of continuing education for attorneys frequently enlist Ms. O’Neil to provide instruction to attorneys on topics of her expertise in the family law arena.