Prepayment of Alimony is not Tax Deductible
November 08, 2012 | Alimony, Court Decisions, Legal Perspective
Under federal tax laws, alimony payments are deductible, but only if they meet all of the legal requirements. One of the most important requirements is that alimony payments must be paid in connection with a “divorce or separation instrument,” which means a written agreement or court order. Any payment that is not made under a divorce or separation instrument is not tax deductible, even if the written agreement or court order is prepared later.
In Chiavacci v. Commissioner, T.C. Summary Opinion 2012-63 (2012), a NON-precedential opinion of the U.S. Tax Court, the taxpayer and his wife had a marital settlement agreement, in which he agreed to pay $500 per month alimony. After several years, the taxpayer experienced a change in circumstances, prompting him to petition for a modification of his alimony obligation. The parties settled the case, agreeing that the taxpayer would pay $20,000 in a lump sum to satisfy and terminate his alimony obligation. He claimed the $20,000 payment as an alimony deduction for the year when he paid it. (Apparently his wife did not claim it as income.) When the court entered an order terminating the alimony obligation, the order did not mention the $20,000 payment.
The U.S. Tax Court first observed that if the $20,000 lump sum payment had been made to satisfy unpaid alimony arrears, there would be no need for a further order or agreement. The existing order or agreement would have been sufficient. But since the payment was made to satisfy a future obligation, it was necessary to have a court order or written agreement in place before the payment was made. It was not sufficient for the taxpayer to claim that it was a prepayment of the existing alimony obligation, because alimony is tax deductible only if it terminates upon the death of the payee.