Court Modified Spousal Support Lump Sum Settlement

[Paul-F1]

In 2014, I was divorced which required monthly spousal support payments to my ex.  The tax implications of that was very clear.  Each year, I was able to deduct what I paid her from my income for both Federal and California income tax purposes.  And she had to claim the support as income for both Federal and California.

In 2019, to eliminate the monthly payments, a court settlement was obtained, and I paid her a one-time lump sum payment (in cash) to end the spousal maintenance forever.  My attorneys said that this lump-sum was not tax deductible by me (or taxable to her), but later qualified their statement and said I should consult a tax professional.  There are no explicit statements in the court settlement that state whether the lump-sum is taxable or not. 

I have asked a couple of Tax Preparers about the tax implications of this lump-sum payment and have not received very confident responses.  Can you verify what the tax implications are for the lump-sum payment for both Federal IRS income tax purposes and for California Income Tax?

Thank You!

[RobertG]

It depends on whether the tax treatment is mentioned in the agreement.

The following statement is from the IRS website: CLARIFICATION: Changes to deduction for certain alimony payments effective in 2019 

"Alimony or separation payments paid to a spouse or former spouse under a divorce or separation agreement, such as a divorce decree, a separate maintenance decree, or a written separation agreement, may be alimony for federal tax purposes.  Alimony or separation payments are deductible if the taxpayer is the payer spouse.  Receiving spouses must include the alimony or separation payments in their income.

Beginning Jan. 1, 2019, alimony or separate maintenance payments are not deductible from the income of the payer spouse, or includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after Dec. 31, 2018. 

This also applies to a divorce or separation agreement executed on or before Dec. 31, 2018, and modified after December 31, 2018, as long as the modification:

• changes the terms of the alimony or separate maintenance payments; and
• states that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.

On the other hand, generally alimony or separate maintenance payments are deductible from the income of the payer spouse and includable in the income of the receiving spouse, if made under a divorce or separation agreement executed on or before Dec. 31, 2018, even if the agreement was modified after December 31, 2018, so long as the modification is not one described in the preceding paragraph."
 

[Paul-F1]

This is a very thorough answer and I really appreciate it.

This part of the IRS clarification seems to be the key for determing taxability for my case:

1. This also applies to a divorce or separation agreement executed on or before Dec. 31, 2018, and modified after December 31, 2018, as long as the modification:
2. changes the terms of the alimony or separate maintenance payments; and
3. states that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.

In my situation, #2 is definitely true - there was a change in terms of the alimony.  But #3 is not true as my attorney's were divorce attorneys and not tax attorneys, so the settlement wording does NOT state anything about the lump-sum payment being not deductible by the payer spouse, etc.   No tax implications are mentioned at all.

So does this mean I have to claim the tax deduction for the Lump-Sum and my ex needs to claim it as income?

Thanks for your very appreciated help.  Do you know what the tax deducting/paying requirements would be for California income taxes?

[LeonardS]

To answer your specific question regarding "states that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse" it is possible that the IRS would not accept the payment under the new rules and would require that the payer deduct the payment and the recipient claim the payment.  Although all parties involved know the intent of the lump sum payment it was not detailed in the divorce modification  as is required by the IRS to comply with the alimony modification that went into effect January 1, 2019.