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.
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.