Worried About Paying Income Taxes on Tennessee Alimony?

With your divorce or legal separation pending in Tennessee, alimony and its impact on your tax liability should be an important concern for you.

Before being ordered to pay alimony, find out if you can deduct the payments from gross income at tax time. If you anticipate an alimony award, find out what your income tax liability will be as the recipient.

You should always seek tax advice from a Certified Public Accountant or tax attorney. For a list, see our Memphis Tennessee Divorce CPA and Tax Professionals Directory or call Miles Mason, Sr., for a referral. This article provides an overview only and exceptions may apply to your particular situation. For more detailed information, See IRS Publication 504 Divorced or Separated Individuals at IRS.gov.

So you have some idea of what to expect, let’s go over four important aspects of alimony tax deductions:

1. Is Child Support Taxable to the Recipient?

First of all, the IRS does not treat child support and spousal support the same way. Unlike alimony payments, child support is not considered to be taxable income to the recipient. When the alternate residential parent (ARP) pays child support, he cannot deduct the payments from his taxable income.

2. What Happens When Child Support Is Connected to Automatic Alimony Increases?

Divorced Tennesseans can run into tax problems when, as part of their final decree, child support payments are tied to automatic increases in alimony. If alimony is actually support for someone other than the spouse, then the financial assistance may not be deductible from the payor-spouse’s gross income.

Here’s an example of a sticky tax situation: In the divorce, wife is awarded $500.00 per month as alimony in futuro. Husband is also ordered to pay $1,000.00 per month in child support for their 17-year-old. When child support terminates in a about a year (the child turns 18 or graduates), alimony is set to automatically increase. The court has authority to issue an order which provides for an automatic alimony increase upon occurrence of a specified event. After all, when child support stops, the husband has another $1,000.00 available to help his former spouse. By pre-arranging an automatic escalation in alimony when child support terminates, the need for the parties’ return to family court under a petition to modify spousal support based upon changed financial circumstances is eliminated. Those circumstances being the end of child support payments.  Erwin v. Erwin, Tenn. Ct. App. (June 26, 2000). However, the IRS may not allow the automatic increase to be deducted from the obligor’s income as payments for alimony.

3. What Criteria Will the IRS Apply?

These criteria determine whether the support is deductible as alimony or not:

• The recipient must be a spouse or former spouse;
• There must be a written divorce or separation instrument;
• Alimony must be made with cash payments (this includes checks and money orders);
• Alimony does not continue after the recipient dies;
• The parties must live apart, residing in different households; and
• The parties must file separate tax returns (they cannot file a joint return and claim the alimony deduction).

For the payor-spouse to deduct alimony payments from gross income, the IRS expects the divorce or separation instrument to be a permanent alimony award, temporary spousal support order, divorce decree, separation agreement, or other similar court order.

4. What Other Things Could Be Considered Alimony?

There are a few surprises in the IRS rules regarding what falls within the scope of spousal support for income tax reasons.

Say, for example, that the obligor-spouse is ordered to pay the premiums for a life insurance policy on his own life, with the other spouse as insurance beneficiary. This is often done to ensure that alimony is paid, even in the event of the obligor’s premature demise. When those life insurance premiums are paid to a third party insurance company (and a few other requirement are met), they are considered by the IRS to be cash payments to the other spouse. As such, they may qualify as alimony and be deducted from the payor’s gross income.

The IRS does not include property transfers with alimony, even if that was the parties’ intent when they turned their separation agreement over to the family law judge. The same holds true if one party is awarded rent-free use of the other’s separate residence, for example, in lieu of cash alimony payments. The divorce or separation instrument may be titled “alimony,” but the IRS will object to the deduction from income. Try not to be overly creative, the transaction may end up outside the IRS’ narrow definition of deductible alimony.

Lastly, it is possible to include a provision in the divorce or separation instrument stating that alimony payments will neither be deducted from the obligor-spouse’s income, nor added to the recipient-spouse’s income. This is definitely one provision your should discuss with an alimony lawyer before signing on the dotted line.

The moral of the story? If it looks like a duck, swims like a duck, quacks like a duck, and is paid with cash, then your alimony award should pass the IRS’ duck test with flying colors.

Contact a Memphis TN Divorce Lawyer

To learn more about paying alimony taxes, take a moment to read Divorce and Taxes | Tennessee Divorce Law and Tax Resources. Also, for legal updates, news, analysis, and commentary, see our Tennessee Family Law Blog and its Alimony category. A Memphis divorce lawyer from the Miles Mason Family Law Group can help. To schedule your confidential consultation, call us today at (901) 683-1850.