Spousal Maintenance, Undifferentiated Support, and Recapture Rule

Spousal Maintenance, Undifferentiated Support, and Recapture Rule

Spousal MaintenanceAn award of spousal support or spousal maintenance (i.e. alimony) is taxable income to the individual who receives the support pursuant to I.R.C section 71(a).  Also, the person who is paying the support receives a tax deduction under I.R.C section 215.  To qualify as spousal maintenance all of the following requirements must be met, (1) the payment must be in cash or its equivalent; (2) the payment must be received by or on behalf of a spouse or former spouse under a court order; (3) the court order must not specifically state that the income is not included as gross income or not allowed as deduction; (4) the individual receiving the support must not reside in the same household as the person paying the support; (5) there is no requirement for the payments to continue after the death of the party who is receiving the support; and (6) the person paying the support and the individual receiving the support must not file a joint tax return for the year in which the support is paid.

It is important to advice a spouse who is receiving alimony to pay estimated tax payments on the alimony when it is received.  It is possible that a penalty may be assessed against the recipient of alimony, even if the recipient of alimony is due a refund at the time of filing of their income tax return.

Undifferentiated Support: Generally, a court order whether temporary or final must specifically distinguish the type of support being provided, i.e., alimony or maintenance versus child support.  An order that does not specify the type of support being provided or an “undifferentiated” or “unallocated” support order will be deemed by the IRS as alimony because it does not “fix” an amount for child support pursuant to IRC Section 71(c).

In Lawton v. Commissioner, T.C. Memo 1999-243, the tax court held that child support guidelines do not fix a portion of an unallocated temporary award of support as “child support.”  In Lawton, the court addressed a Pennsylvania court’s temporary order “for support of spouse and one child” (unallocated temporary support for the wife and child). The court declined to accept the wife’s argument that a portion of the payments were not alimony taxable to her because all awards for support must conform to the federally mandated child support guidelines. The Court determined that IRC Section 71(c)(1) requires that the amount of child support must be fixed by the terms of the divorce or separation instrument  not outside of the instrument.  The court determined that the wife should have had the divorce court characterize the payment as either maintenance or child support.

Recapture Rule: Both family law practitioners and clients should be aware of spousal maintenance awards that are disguised as property settlement awards.  The Internal Revenue Service has additional rules that prevent property settlement payments from qualifying for the tax benefits available to spousal support payments.  Generally, if alimony payments decrease or end during the first 3 calendar years, the recapture rule may apply. For example, if the divorce or legal separation document states that the Husband will pay the Wife a large sum of spousal support in the first year, and then substantially less support in second and third years, the IRS has a formula known as the “recapture rule” that may require the individual paying the support to recapture some of the money paid in year one as taxable income.  The recapture rules are set for in I.R.C section 71(f).