Divorce agreements can have three basic types of payments: child support, periodic alimony and lump sum alimony or property settlement. The tax aspects of these payments are typically spelled out. Parties and attorneys often fail, however, to specify the tax aspects of other payments such as for house payments, car payments, or insurance premiums. Failure to specify can lead to undeserved tax consequences.
In one reported decision, the divorce agreement provided that the Husband was to make house payments for a time. Nothing was said as to whether the payments were alimony or child support. The IRS ruled that the payments were “alimony” and should have been included on the woman’s tax return as income. Parties and attorneys should pay attention to the following issues when providing for payments”
- When do they start?
- When do they end?
- What is their character, child support or other?
- Should the payments be included as income or not, and what language is necessary under IRS regulations to ensure the intent of the parties is clear?