Tax Brake with Robert G. Nath, Esq.

The couple got into difficulties after the husband retired (lesson there?). They signed a divorce decree which provided, in part, that the payments to the wife were a “property settlement.” That was enough, she argued, for the payments to be non-“alimony” and therefore excludable from gross income.

The tax law used to provide other rules for determining whether payments like this were taxable alimony. It depended on the intent of the parties, not some objective standard. So Congress changed the law in 1984, providing strict, objective rules for alimony treatment. One of those rules was that the divorce or separation decree did not specifically designate the payments as being excludable from income. If it did, then the payments were excludable. If it did not, they were taxable. In the case, the Court ruled that simply calling payments “property settlement” was not enough to take the payments out of “alimony” land.

The lesson? Be specific. State in the decree that the payments are not intended to be alimony, or language like that. It's not hard; the Internal Revenue Code gives you the formula.

But the result in the case in court was correct: the specificity Congress required was lacking. Moreover, the result was fair: the husband had deducted the payments, as “alimony.”

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