Notes from the field: Asking for Alimony v. Child Support

By Guest Blogger Don Paris, CPA, MST, CDFA.

So, you and your ex came to agreement on alimony (aka spousal support) and child support. Now you move to the tax issues surrounding them. With alimony, you need to agree as to whether or not they are deductible by the payor and includable as income to the recipient. With child support, the tax issues are simple, i.e. child support is neither deductible by the payor nor includable as income to the recipient.

With alimony, I want to look at a recent Tax Court case of Allen H Johnson v. Commissioner, TC Memo 2014-67. After more than 15 years of marriage, the couple divorced in 2006. There were 3 minor children. Mr. Johnson was to pay alimony until (a) the graduation from high school of the youngest child, (b) remarriage of Mrs. Johnson or (c) the death of either Mr. or Mrs. Johnson. The agreement stated that alimony shall be deductible to Mr. Johnson and includable as income to Mrs. Johnson.

The issue here is how to treat the alimony and child support payments for tax purposes. We already know that alimony is deductible where it is includable in the income of the recipient. Code section 71 tells us that alimony is a cash payment where (a) the payment is received by a spouse under a divorce or separation agreement, (b) the agreement does not state that the payment is neither includable in gross income nor allowable as a deduction, (c) the payor and payee spouse are not members of the the same household when the payment is made, and (d) the payment obligation terminates at the death of the payee spouse and there is no liability to make either a cash or property payment as a substitute for the payment after the death of the payee spouse. This code section also tells us that any payment subject to contingencies involving a child must be considered made for the support of the child, i.e. child support. The Code even cites “children leaving school” as an example.

So, what happened? Mr. Johnson deducted the alimony payments as they agreed. His tax return was audited, and the IRS challenged the alimony deduction because they agreed that payments were to stop when the youngest child graduated from high school. In this case, the IRS was right. These payments were child support payments disguised as deductible alimony.

Years later, we ask ourselves how the IRS would even find this one. Very easy. Payer deducts the alimony on their tax return and discloses the recipient spouse Social Security number. Recipient does not show the income on their return. IRS sends a matching letter to recipient who tells the IRS that, because of the child related contingency, the alimony is not taxable income, and gives them a copy of the agreement to support that claim. Now, the IRS audits the return of the payer.

So, what is our bottom line? Before you sign a divorce or separation agreement, make sure that your tax professional has reviewed it (and that your tax professional is knowledgeable about tax issues related to divorce). That one step will help ensure that the results you want are the results you will get.