Is It Alimony as Defined in I.R.C. 71? Part 2

Just because temporary alimony is labeled as such in a divorce agreement, it doesn’t automatically mean it has to be taxed. There are exceptions, like if the payee and payer are living together, or if there’s no need for a recalculation of the alimony. Other requirements also have to be met for the payments to be taxable or deductible. So, if a divorce agreement says that the temporary alimony isn’t taxable or deductible, then that’s how it will be treated for tax purposes. – If a court order includes both alimony and child support as unallocated (undesignated), it may still be taxable/deductible.
– This is because the payments are not considered fixed as child support, so they can still be taxed and deducted as alimony.
– The IRS has rules about when payments are considered child support, and in some cases, they may not be taxable/deductible.
– One case in Colorado found that temporary support payments were not taxable/deductible because they did not cease upon the death of the recipient.
– It’s important for divorcing couples to understand the tax implications of their support payments and to make agreements about them in their divorce decree. The Miller case teaches us to be “tax safe” when it comes to alimony and child support payments. If the payments are meant to be tax-free, make sure they are labeled that way. If they are supposed to be taxable, they should stop when the recipient dies. It’s also important to specify the intended tax consequences and make adjustments if needed. It’s also important to note that temporary alimony awards can have tax implications and it’s best to address this at the final hearing. Retroactive tax effects can only be given if a subsequent order corrects a mistake, omission, or mathematical error. In the Johnson case, a court corrected a mistake in a divorce decree that led to the wrong amount of money being paid for alimony and child support. The Tax Court agreed that the correction should apply retroactively because it was clear that the original decree was wrong.

But in the Turkoglee case, the court did not agree to retroactively change a divorce decree because it didn’t seem like there was a mistake in the original decree. Instead, it looked like the court just wanted to change the rights of the people involved.

So, in the Johnson case, the court agreed to fix a mistake in the divorce decree, but in the Turkoglee case, the court didn’t think there was a mistake to fix. If the person paying alimony loses a lot of money and can’t afford to pay as much, the court can lower the payments without the person having to pay extra taxes. But if the person later has to pay more taxes because of the lower payments, the court can’t do anything about it unless they made a specific plan when they first decided on the alimony. In order to avoid the recapture problem with alimony payments, it’s better if the payments are based on a fixed percentage of the payor’s income rather than a fixed amount. This means the amount of alimony can go up or down based on how much the payor is earning, without triggering the recapture rule. However, courts have generally not allowed for automatic adjustments in alimony payments, such as automatic increases or decreases based on certain events like retirement. So, it’s important to be cautious when setting up alimony payments to avoid running into problems later on. The court decisions in the cases mentioned were made before the tax law changed in 1985. Because of this change, the Florida case law may need to be updated. We want to teach our members to be responsible and helpful to the public, make the legal system better, and keep learning about the law.

Source: https://www.floridabar.org/the-florida-bar-journal/is-it-alimony-as-defined-in-i-r-c-71-part-2/