There are numerous federal tax ramifications associated with the termination of a marriage. While the division of marital assets generally is not a tax recognition event, the payment of spousal support generally is. Spousal support still referred to as alimony for tax treatment, usually results in the payments being taxable to the recipient and deductible to the payer. Internal Revenue Code Sec. 71(b) (1) sets forth the requirements to make the payments deductible. Sec 215 governs the reporting of alimony as income.
The requirements to make the payments deductible include that the payments must be made in cash pursuant to a written agreement legally binding the parties. A divorce decree or separation agreement meets the requirement of a writing. The payments may be made to a third party so long as the payee receives an economic benefit such as payment on a mortgage. The parties may not be members of the same household, but the existence of a separation agreement may satisfy that provision even though the parties have not yet physically separated at the time the payment is made. The payments must not, in reality, be child support and the parties must not have agreed to make the payments non taxable and non deductible.
The payments must also stop upon the death of the recipient spouse. There must not be any substituted payments after the recipients' death. Prior to 1986, the agreement or decree must have contained an express provision that the payments would stop at the recipient's death. After 1986 local law could meet the requirement. Ohio law provides that the payment of spousal support terminates upon the death of either party unless the decree or agreement expressly provides otherwise.
In a recent Franklin County, Ohio case, husband complained on appeal that the trial court did not specifically order that the alimony payments husband was to make would be taxable to wife and deductible to him. The court of appeals held that the trial court did not have to do as the Ohio law provides for the termination of the payments at the death of either party thus making the payments taxable and deductible.
While the parties may intend the payments to be taxable and deductible, the timing of the payments may dictate the ultimate tax treatment. Although a complicated concept, Sec. 71 provides that deducted payments may be recaptured and treated as income to the payer in the third year after divorce if the support paid in either the second or third year decreases by more than $15,000 from the prior year. Drafting of the spousal support schedule is obviously critical.
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