Q. My wife and I separated in February, 2012. It is tax time and I am wondering if the money I've been giving her is tax deductible. We haven't filed for divorce or legal separation.
A. I seem to keep bumping into a number of new cases recently where this is an issue because people have separated for a period of time, but neither has filed any proceedings or researched what is required to ensure tax deductibility. This is an area where people get nasty surprises, and there is little that you can do about it if you get it wrong.
Most people know that spousal support is deductible to the payor spouse, and treated as taxable income to the supported spouse. However, in order for that to be so, you must meet certain I.R.S. requirements. Sometimes the support recipient refuses to admit the support as income on his or her return, which can lead to a disallowance of the deduction or an audit. Even if they acknowledge the income, if you are audited you will still must meet the requirements discussed in this article.
According to Internal Revenue Code (IRC) section 71(b)(1)(A), in order to deduct the payments on an individual or married-filing-separately return, the payments must be made on account of a support obligation that arises under a "divorce or separation instrument."
A "divorce or separation instrument" is either:
- A decree of divorce or separate maintenance (i.e., an award of of "alimony" or "spousal support") or a written instrument incident to the status of divorce; or
- A written separation agreement; or
- A decree ordering support payments, such as a temporary support order.
Hence, you don't have to have a pending divorce to be entitled to a deduction for spousal support as long as you have a jointly signed "separation agreement." Oral agreements do not suffice, and oral modifications changing the support amounts contained in a written order also don't qualify. The surest way to protect your deduction is to at least file for a legal separation (especially if you are uncertain whether the marriage is really over), and then prepare a written stipulation and order and submit it to the clerk's office for a judge for signature and filing. There can then be no challenge to the authenticity of the agreement.
In your case, if your wife wishes to become uncooperative, and so avoid the tax consequences to her, she may refuse to sign a "separation agreement." Even if she does, you have a problem as to the money you gave her before. Payments predating a divorce or separation instrument are not deductible. IRC section 71. This is true even if a written separation instrument or stipulation with the Court characterizes the support that was paid as retroactive to some earlier date.
If you and your wife were to today draft an agreement and fill in earlier dates, you are defrauding the government. A court filed stipulation establishes the effective date of the instrument, but where people are "cooling off" and don't yet know which direction their marriage will take, there is often resistance to filing the required underlying disso or legal separation and therefore no way to get a stipulation filed.
Confirmation letters between the attorneys for spouses (i.e., informal agreements reduced to written), whether there is already a legal proceeding pending or not, don't constitute the requisite "written instrument" because they are not signed and returned by the payee herself. This is an area that is ripe for attorney malpractice. A separate agreement must be prepared that the parties sign.
For those of you who haven't yet obtained a written instrument that will satisfy the IRS, I recommend that you refuse to pay your spouse any (further) support until and unless they sign a writing that establishes that (a) you are paying voluntary support, (b) that these payments are incident to separation, and (c) the receiving party understands that the money they are receiving is taxable to them and must be reported as income to the IRS in their tax returns, and (d) that they agree to report that income and further to indemnify you from any adverse tax consequences, including interest and penalties, if they later don't report it properly. The last point is not essential, but just an added tip. You could even go farther and state that if there is any litigation to enforce the terms of your agreement, the Court should award attorney fees to the prevailing party.
Remember, deductible spousal support can encompass more than payments directly to your ex. It is common for people to make payments to third parties for a spouse's benefit (i.e., rent, medical insurance, credit cards, or any form of personal expense). This may be okay, but when you prepare your "instrument" error on the side of specificity in detailing what is to be credited against the obligation. Not only is that required for deductibility, if your spouse later files a request for support orders it will ensure that you will be properly credited for whatever you paid before a court order for support comes into existence. Since most courts award support retroactive to the date the application was filed, you want all the credits you bargained for.
Also, there are important exceptions to this rule relating to mortgages, taxes, and interest. Please see my next Blog, written today.
