Almost every divorce case that comes through our office will have spousal support (also called alimony) as a major issue. Whether we represent the party who will pay spousal support or we represent the party who will receive spousal support, one of the first topics we discuss is how the IRS will treat spousal support payments.
The IRS will treat spousal support as “income” to the recipient and a “deduction” for the payor so long as all of the requirements of IRC §71 are met. These requirements are often referred as the “Seven D’s.”
This is the requirement that the spousal support payment be made in cash (as opposed to via transfer of property). This includes the payment of expenses by the payor on behalf of the payee. For example, if a Wife owes Husband spousal support of $1,000 per month, she can satisfy that obligation by paying Husband’s $500 a month car payment and sending the remaining $500 to Husband in cash.
This means that the payment of the spousal support is made pursuant to a written court order or other written agreement drafted in connection with a divorce case. Agreements, even in writing, signed and dated before a Petition for Dissolution has been filed will not satisfy this requirement.
This is the most counter-intuitive of all of the rules since it contains a double-negative. Specifically the rule says payments must not be designated as not includible in gross income under §71 and not allowable as a deduction under §215. In layman’s terms, the agreement cannot say that the payments are not income and not deductible. If the agreement is silent about whether the payments are income/deductible, then the agreement will satisfy this rule.
A good family law attorney will address this rule by including a provision in the Agreement that specifically states that the payments are includable as income to the recipient and are deductible by the payor.
Except for temporary order (orders made while the divorce is still pending) the spouses or former spouses cannot be members of the same household. Again, if the order is for temporary spousal support, you and your spouse can still reside in the same house.
This is the requirement that the Agreement specifically indicate that the spousal support payments will automatically end upon the death of the payee (support recipient).
We are also asked whether the agreement must state that the spousal support payments will end upon the remarriage of the payee (support recipient). The answer is no, this is not a requirement for compliance with IRC §71.
Spousal support may not be fixed as child support. In fact, there must be a very clear distinction between spousal support and kid-related events. For example, if your agreement states that spousal support will terminate upon the emancipation of a child, there is a good chance the IRS will determine the payments were in fact child support and deny the deduction. It may also prompt them to go back and recalculate past spousal support payments resulting in you owing money to the IRS.
There may be a very good reason to adjust spousal support around the same time that child support ends or another child centered event. If that is the case, you would be well served by the assistance of competent family law counsel (and likely a lawyer specializing in tax law.)
This is the most confusing rule. The alimony payments cannot be front loaded in excess of the permissible amounts, otherwise the alimony will be subject to re-computation in the third post-separation year. In layman’s terms, you cannot pay a large amount of spousal support in the first year and then pay significantly reduced amounts in the second and third year. The reason is the IRS may find that these are not support payments, but rather part of the property division disguised as spousal support. The limits are set forth 26 U.S. Code § 71 (f). You would be wise to consult family law counsel and tax counsel if for any reason the terms of your spousal support appear to run afoul of this section.
It is very important that you speak with a qualified family law attorney before you enter into an agreement to pay or receive spousal support. Making a mistake in your spousal support order could result in spending a lot of time and money dealing with the IRS.
Feel free to contact us if you are considering a divorce from your spouse, a legal separation, or have questions regarding spousal support. 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.