Look, I get it. Having to fork over most of your hard-earned cash to your ex-wife every month must totally suck. Particularly when everyone in town knows she’s been using the money to shower her new 23-year old boy-toy with Ed Hardy gear. If it were me, I’d want to
blow up her car deduct the payments on my tax return too, if only to ease my pain with the resulting 35% tax benefit.
But there’s the tax law to be dealt with, and despite taxpayers’ consistent inability to comprehend the statute governing alimony payments, it’s not overly complicated. Alimony payments are deductible; child support payments aren’t. In order for a payment to qualify as deductible alimony under I.R.C. § 215, all four of the following conditions must be met:
1. The payment is received by (or on behalf of) a spouse under a divorce or separation instrument,
2. The divorce or separation instrument does not designate such payment as a payment which is not includible in gross income and not allowable as a deduction under section 215,
3. In the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and
4. There is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.
Now, while I can see where tests 1, 3, and 4, could potentially create some controversy, #2 is about as straightforward as it comes. The agreement either says the payment is not deductible/not includible or it doesn’t. No way that would ever be litigated, right?
Eh…check out the Tax Court’s decision yesterday in Kouskoutis v. Commissioner, TC Summary Opinion 2012-64.
In 2008, Kouskoutis and his wife separated. A temporary order was drafted up in the divorce case containing the following requirement:
8. Once [petitioner’s former spouse] moves from the marital residence, [petitioner] shall pay [petitioner’s former spouse] unallocated family support in the amount of $3725.00 per month . [Petitioner’s former spouse] shall not be required to report such payments as income on her tax return. [Emphasis added.].
Undeterred by such plain language, Kouskoutis deducted payments of $44,700 he made to his ex-wife in 2008 as alimony. The IRS denied the deduction, alleging they failed to meet the definition of deductible alimony because the payments were designated as non-includible income to his wife.
The Tax Court, by virtue of employing individuals who can actually read, sided with the IRS.
In the instant case, however, paragraph 8 of the Temporary Orders contains a clear, explicit, and express direction that the disputed payments are not to be includible in the income of petitioner’s former spouse. Although the language does not precisely mimic the language of section 71(b)(1)(B), we hold that the substance of a nonalimony designation is reflected in the Temporary Orders. Consequently, the disputed payments do not meet all four of the conjunctive requirements provided by section 71(b)(1) and thus do not constitute alimony or separate maintenance payments deductible under section 215(a).