An omitted clause in a divorce agreement can be costly

Few parties to a divorce wish to pay excessive alimony to an ex-spouse. However, it is worth noting that alimony is a tax deduction for the paying party. In order to take advantage of the deduction, the divorce documents must be drafted properly. Those required to pay alimony in Pennsylvania should be aware of a recent Tax Court ruling.

In a Tax Court decision filed on November 27, payments intended as alimony were denied a federal tax deduction due to failure to have a termination clause in the divorce decree. The IRS has six requirements for alimony payments to qualify as a tax deduction. They are as follows: the parties must file separate returns, payments must be in cash, payments are made pursuant to a divorce decree or separation agreement, the payment is designated as alimony, the parties live apart and the obligation terminates upon the death of the recipient.

In the Tax Court case, the divorce agreement omitted the provision terminating the obligation on the death of the recipient. For that reason only, the IRS denied the deduction.

Though the IRS looked to state law to determine whether alimony terminates automatically, it found the applicable Texas statute unclear. Therefore, the Tax Court sided with the IRS. It didn't matter that the ex spouse was still living and receiving alimony.

Even modest alimony payments amount to several thousands of dollars per year. Failure to have those payments qualify as a tax deduction can constitute substantial economic impact on the paying party. However, a family law could help a client properly draft divorce documents.

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