Payor Beware: Pitfalls with Deductible Spousal Support

According to section 215 of the Internal Revenue Code, spousal support (otherwise known as alimony) is generally taxable income to the payee and tax deductible to the payor. However, if payors aren’t careful, they may inadvertently agree to support arrangements that are not deductible.

Retroactive Support

In California, the Court has discretion, and often exercises this discretion, to award spousal support retroactively to the date of filing. For instance, if a spouse files a spousal support motion on January 1, 2016, but it is not heard until March 1, 2016, the Court can still order the payor to pay for the months of January and February even though the hearing wasn’t until March.

It is very common for payor spouses to pay voluntary support during the period of retroactivity, before the hearing. The problem is, Internal Revenue Code section 71 requires that spousal support payments must be made pursuant to an already existing divorce or separation instrument in order to be deductible. In other words, if there is not a written agreement signed by the parties before the voluntary spousal support payments begin, these payments are not permitted to be tax deductible to the payor spouse even if the Court retroactively characterizes these payments as spousal support. (See Ali v. Commr., TC Memo. 2004-284 and Baur v. Commr., TC Memo. 2014-117)

Death of the Payee

Occasionally, a payor spouse will agree to pay spousal support to his/her spouse beyond the payor’s death. As far as deductibility is concerned, this doesn’t pose any problems. However, as a matter of law, any agreement to pay spousal support that provides for even one spousal support payment beyond the death of the payee, renders every spousal support payment pursuant to that agreement as nondeductible by the payor.

Contingencies related to a child

This one can be tricky. Let’s look at the statutory text first. IRC 71(c)(2) provides as follows:

(2) Treatment of certain reductions related to contingencies involving child.–For purposes of paragraph (1), if any amount specified in the instrument will be reduced–

(A) on the happening of a contingency specified in the instrument relating to a child (such as attaining a specified age, marrying, dying, leaving school, or a similar contingency), or

(B) at a time which can clearly be associated with a contingency of a kind specified in subparagraph (A), an amount equal to the amount of such reduction will be treated as an amount fixed as payable for the support of children of the payor spouse.

In other words, if it looks like child support, and smells like child support, the IRS is going to treat it like a child support payment, even if the parties call it spousal support. Remember, spousal support, not child support, can be deductible.

An example may be helpful. If one party agrees to pay spousal support at the rate of $2,000 until a child of the parties turns 18, the IRS will treat that entire $2,000 as child support. If the agreement provides that spousal support will be paid at $2,000 per month until the child turns 18, and then support will be reduced to $1,000, $1,000 of the support paid until the child turns 18 will not be deductible.

Feel free to contact us if you are considering a divorce from your spouse, a legal separation, or have questions regarding child custody and visitation. Nancy J. Bickford is the only Certified Family Law Specialist (CFLS) in San Diego County who is also a licensed Certified Public Accountant (CPA) with a Master of Business Administration (MBA). Don’t settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County or San Diego.

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