Congress recently repealed I.R.C. §§ 71 and 215, which eliminated federal tax deductions for alimony. They have additionally repealed I.R.C. § 61(a)(8), which designated that alimony was taxable income. However, divorce and separation agreements that were executed after December 31, 2018 are the only ones this new law applies to. Below we look at some recent cases involving alimony deductions.
Berger v. Comm’r, T.C. Memo. 2021‑89, 2021 WL 2981716 (2021)
- Facts: In Israel, a divorce settlement agreement which included a visitation agreement was entered for a husband and wife. The agreement required the wife to pay for the children’s travel expenses to visit the husband in the United States twice a year and for the husband’s expenses to travel to Israel three times a year. The agreement was signed by the wife’s parents to guarantee that the travel expenses would be paid for. The wife’s parents subsequently were responsible for paying the expenses because the wife was not able to. An alimony deduction for all of the travel expenses was claimed on the parent’s tax return. The IRS did not allow the deduction and determined a deficiency. An appeal was made to the Tax Court by the wife’s parents.
- Issue: Was the alimony deduction something that the wife’s parents were entitled to?
- Rationale: Since the alimony payments were made on behalf of another person, an alimony deduction is not allowable. An alimony deduction is only allowed to the obligor spouse and not to any other person who is making the alimony payment on behalf of the spouse.
- Lessons and Observations: If you are going to be making payments for alimony on behalf of someone else, do not claim these as alimony deductions on your taxes.
Leyh v. Comm’r, 157 T.C. No. 7, 2021 WL 4520671 (2021)
- Facts: A separation agreement was signed by a husband and wife during their divorce proceedings. The agreement required payment by the husband of the wife’s health insurance premiums while the case was ongoing. The health insurance premiums were automatically withheld from the husband’s paycheck and, as permitted by law regarding health insurance benefits taxation, the amounts withheld were excluded from his gross income. An alimony deduction was also claimed by the husband for the amounts he paid for the wife’s health insurance. The IRS did not allow the deduction and determined a deficiency. An appeal was made to the Tax Court by the husband.
- Issue: Was the husband entitled to the alimony deduction?
- Rationale: The IRS claimed that the husband could not claim an alimony deduction and exclude the health insurance premiums from his gross income. The court ultimately disagreed. They concluded that since the wife was required to list the alimony payments in her income, then the husband is allowed a deduction.
- Lessons and Observations: Under the law regarding divorce and separation agreements before December 31, 2018, since the alimony is seen as taxable to the payee, the payor is entitled to claim an alimony deduction. Since the husband had the payments for the health insurance withheld from his paychecks, he did not have to pay taxes on it. However, regardless of the fact that he did not have to pay taxes, he still had to pay for the wife’s health insurance premiums. The money received by the wife was still seen by the IRS as taxable income, therefore the husband is still entitled to declare that money as an alimony deduction.
The changing of alimony tax law is important to note for those who have existing separation and divorce agreements. If your agreement was made before December 31, 2018 and it becomes modified, the new tax law applies if the modification states so. The former law will continue to apply if the agreement does not state that it will be following the new tax laws or if it states its intentions to follow the former law. This changing of the alimony tax law is also important to note for those who are preparing for separation and divorce. It is helpful to know that these payments cannot be claimed as taxable income to the spouse who receives it and can no longer be seen as a tax deduction to the spouse who is paying the alimony.