SFA Posted March 4, 2014 Report Share Posted March 4, 2014 Here is my client's situation: Client divorced in 2013. Prior to divorce the court separation agreement specified that no spousal support shall be taxable income to client. After divorce, the payments continue and have been reclassified as Alimony. Her attorney says the alimony payments continue as non taxable, because both parties mutually agreed to this stipulation. (I am pressing her to show me the documentation.) If this turns out to be true, then she receives approx. $1,700 in refundable tax credits (EIC & add'l child tax credit) only because of this "agreement." Can the divorce court write tax law? Can refundable tax credits be manipulated this way? Alimony is Alimony--with all the tax rules associated with it--Or is it? This doesn't smell right to me. Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted March 4, 2014 Report Share Posted March 4, 2014 Correct me if I am wrong but Alimony payments received are not earned income for purposes of determining EIC. If alimony is the only source of income then they are not entitled to the EIC. I agree with you on wanting to see the documentation. I certainly would think that the party paying the alimony would want to deduct the payments and it does seem odd that they would have agreed not to. I am not sure but I think tax law overrides court decisions. Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted March 4, 2014 Report Share Posted March 4, 2014 IRS regulations cannot be changed or circumvented by a county court. PERIOD. You must file the return per IRS regulations or not at all. If it is non-taxable income, it is a gift and NOT alimony. Gifts are not taxable and have no impact on the return. The court may call it alimony, but the IRS will not. So, if the court insists it is Alimony, then it is taxable to the recipient and deductible by the payer. Someone need to teach some lawyers and judges that the IRS is not bound by anything they say or do. Sticky place you are in. Maybe one to pass on down the road... You will be responsible for filing the numbers accurately according to IRS regulations, despite any court order. Quote Link to comment Share on other sites More sharing options...
SFA Posted March 4, 2014 Author Report Share Posted March 4, 2014 Correct me if I am wrong but Alimony payments received are not earned income for purposes of determining EIC. If alimony is the only source of income then they are not entitled to the EIC. I agree with you on wanting to see the documentation. I certainly would think that the party paying the alimony would want to deduct the payments and it does seem odd that they would have agreed not to. I am not sure but I think tax law overrides court decisions. Yes, you are right Terry, alimony is not earned income, but EIC worksheet A, asks for the amount from 1040 line 38, which does affect the calculation. Jack, I agree with you as well, but when I "googled" alimony, there are enough quick references where the parties are agreeing to not adjust for--or include--alimony on the respective ex-spouses returns. And then there is the refundable "additional child tax credit" in play as well. Yes, Jack, this is a "stinky" situation! Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted March 4, 2014 Report Share Posted March 4, 2014 Yes, you are right Terry, alimony is not earned income, but EIC worksheet A, asks for the amount from 1040 line 38, which does affect the calculation. Jack, I agree with you as well, but when I "googled" alimony, there are enough quick references where the parties are agreeing to not adjust for--or include--alimony on the respective ex-spouses returns. And then there is the refundable "additional child tax credit" in play as well. Yes, Jack, this is a "stinky" situation! What matters is the IRS definition of Alimony. Parties agreeing does not change the IRS regulations. 1 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 4, 2014 Report Share Posted March 4, 2014 If the separation agreement or divorce agreement is executed in a manner where both parties agree that it is not alimony, then it isn't taxable to the recipient and isn't deductible by the payer. See the portion cut & pasted from Pub 17 for how both parties CAN agree that the payments are not alimony. From Pub 17 - (note: this is when it would be alimony. See bold item below) Alimony requirements. A payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met. The payment is in cash. The instrument does not designate the payment as not alimony. Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. There is no liability to make any payment (in cash or property) after the death of the recipient spouse. The payment is not treated as child support. Each of these requirements is discussed below. Payments designated as not alimony. You and your spouse can designate that otherwise qualifying payments are not alimony. You do this by including a provision in your divorce or separation instrument that states the payments are not deductible as alimony by you and are excludable from your spouse's income. For this purpose, any instrument (written statement) signed by both of you that makes this designation and that refers to a previous written separation agreement is treated as a written separation agreement (and therefore a divorce or separation instrument). If you are subject to temporary support orders, the designation must be made in the original or a later temporary support order. Your spouse can exclude the payments from income only if he or she attaches a copy of the instrument designating them as not alimony to his or her return. The copy must be attached each year the designation applies. 2 Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted March 4, 2014 Report Share Posted March 4, 2014 And, of course, the reason the agreement must be attach each year [which means paper filing, btw] is so they can make sure the other party to the agreement does not deduct the payments as alimony. 1 Quote Link to comment Share on other sites More sharing options...
SFA Posted March 4, 2014 Author Report Share Posted March 4, 2014 So the alimony payments are "under the table." That's just great. Actually, I don't have a problem with that part. However, I do have a problem that this strategy may increase refundable credits, which comes from the rest of us taxpayers. 2 Quote Link to comment Share on other sites More sharing options...
michaelmars Posted March 4, 2014 Report Share Posted March 4, 2014 yeah but theoretically, the non alimony payer has higher income now and may not qualify for benefits on his end, thus an offset. Quote Link to comment Share on other sites More sharing options...
SFA Posted March 4, 2014 Author Report Share Posted March 4, 2014 Agreed Michaelmars, but I know in this case, the "higher" bracket will not generate enough $$$ to offset the refundable credits. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted March 4, 2014 Report Share Posted March 4, 2014 So the alimony payments are "under the table." That's just great. Actually, I don't have a problem with that part. However, I do have a problem that this strategy may increase refundable credits, which comes from the rest of us taxpayers. It effectively makes the payments into 'gifts', but since they are 'required' gifts, they are not really gifts. I agree with you, it's a stupid provision, and not fair. But then, that's true of several parts of the code, isn't it? 1 Quote Link to comment Share on other sites More sharing options...
jshtax Posted March 4, 2014 Report Share Posted March 4, 2014 Look at it as division of assets. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted March 4, 2014 Report Share Posted March 4, 2014 Except they already divided the 'marital assets', these payments come out of his current earnings. Quote Link to comment Share on other sites More sharing options...
joanmcq Posted March 4, 2014 Report Share Posted March 4, 2014 They may have agreed on lower payments because of the nontax implications. Think of it as a clause that makes it 'intentionally defective'. Btw, you wouldn't need to paper file; you can attach anything as a PDF file now. Quote Link to comment Share on other sites More sharing options...
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