With Tax Day (April 15th) near approaching, both CPAs and divorce attorneys alike are likely receiving an influx phone calls from clients regarding the tax implications of spousal support, often referred to as alimony.
Generally, spousal support is considered to be tax-deductible to the spouse who is paying the support. On the other hand, spousal support must be reported as taxable income to the spouse who is receiving the support. For individuals who stay at home to care for young children and have no other source of income other than the receipt of spousal support after divorce, the tax hit due April 15th might pose quite a significant financial concern.
Although not commonly known, spousal support payments can in fact be designated as non-taxable and non-deductible so long as both parties agree and such an agreement is pursuant to a divorce or separation instrument. During divorce settlement negotiations, agreeing to designate spousal support as non-deductible and non-taxable may be suggested by divorce attorneys in situations where the paying spouse does not want/need the tax deduction, and the recipient spouse does not want to report the income. For instance, as described above, the receiving spouse may not want to report the income so as to avoid the tax hit at the end of the year. Lolli-Ghetti v. Lolli-Ghetti, on the other hand, is an example of a divorce case where the payee spouse did not need the tax deduction because he was a resident of Monaco and the bulk of his income was therefore not subject to federal, state and local income taxes.
There are three types of divorce or separation agreements by which the designation of non-taxable/non-deductible spousal support can be detailed in:
- A decree of divorce or separate maintenance or a written instrument incident to such a decree;
- A written separation agreement; or
- A decree requiring a spouse to make payments for the support or maintenance of the other spouse (as defined in 26 U.S.C. §71 (b)(2)).
The instrument must contain a clear and explicit designation that the parties have elected for the spousal support to be non-taxable to the payee and thus excluded from payee’s gross income and non-deductible to the payor. It is also important to note that a copy of the instrument, which contains the above designation of spousal support payments as non-taxable/non-deductible, must be attached to the payee’s tax return (Form 1040) for each year that the designation applies to.
Please contact us if you are considering a divorce from your spouse or a legal separation. Nancy J. Bickford is the only attorney in San Diego County representing clients in divorces, who is a Certified Family Law Specialist (CFLS) and who is actively licensed as a Certified Public Accountant (CPA). Don’t settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County, or San Diego.