Many taxpayers don’t believe they are collecting alimony when they really are recipients of this income category – even individuals living in states where alimony is not granted. Consequently, tax practitioners must prepare to encounter alimony instances based upon the facts and circumstances of taxpayers. Enrolled Agent tax experts located in non-alimony states – such as Texas – should therefore learn to recognize cases where alimony exists.
A payment is classified as alimony regardless of whether the parties designate it as such by using that term. EAs might identify alimony situations although the payments are not specifically designated as satisfying a support obligation. Despite state definitions for payments between spouses or former spouses, the criteria for alimony are specified in federal tax rules. These are crucial elements for EAs in every state to grasp from their Enrolled Agent study materials.
Whenever payments from an individual comprise alimony, the sums reduce taxable income. Recipients of payments that constitute alimony are taxed on the amounts. These situations are likely to entail protest from unsuspecting spouses. More than a few clients during an Enrolled Agent career falsely believe that they escape tax consequences merely by avoiding use of the word “alimony.” EAs know this isn’t true.
Alimony must be paid in cash. Therefore, any amount of money received from a spouse or ex-spouse could be classified as alimony – if other conditions are present. However, transfers of property, granting of services, or execution of a promissory note are never alimony payments. Cash payments to third parties on behalf of the payee spouse can qualify as alimony if the payee gives written instructions consenting or requesting such acts by the payer.
A possible alimony arrangement uncovered during study for the Enrolled Agents exam is payment by a spouse or former spouse for debt on a jointly owned residence. One-half of the mortgage payments might be treated as alimony. This incidence exposes two other requirements for alimony cases. First, the parties must reside in separate households when payments are made. In addition, the parties must file separate tax returns.
The next factor addressed in EA training about this subject is that alimony requires payment pursuant to a “qualifying instrument.” This necessitates a divorce decree, separation agreement, or other written document specified in a decree. Payments under these instruments are not alimony if the parties expressly agree to designating them as nondeductible by the payer or excludable from income of the payee. However, an instrument that is silent on these facts does not preclude either party from later identifying payments as alimony. A corollary necessity for existence of alimony is that the payments must not comprise child support. Any single payment of both child support and alimony is applied first to child support obligations outstanding, with the remainder covering the alimony obligation.
Perhaps the most important consideration Enrolled Agents must apply when deciding if payments are alimony has been the subject of multiple Tax Court cases. The rulings in every trial have specified that payments are not alimony when the payer is obligated to remit any amounts after the death of the payee spouse. Alimony agreements may permit continuation of payments after death of the payer, but alimony must end when the payee dies.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.