Are alimony buyouts taxable?

[mlnate1]

Husband's pre-2019 divorce decree declares alimony payments of $2,500/mo for life.  If husband enters into an agreement with ex-wife to prepay 10 yrs of alimony (a lump sum payment of $300K) in exchange for forgiveness of all future alimony payments:

1.  Does this constitute a "gift" to the ex-wife?..... or

2.  Is this a non-taxable exchange (i.e. bona fide equal value exchange)? or

3.  Is this lump-sum payment taxable to to ex-wife?

[DoninGA]

Your questions would be better handled by a tax attorney who is versed in these matters. 

[Bsch4477]

You should consult with a knowledgeable tax attorney in your area. California, Illinois, and New Jersey allow periodic alimony payments to be deducted for State tax purposes, but not lump sum alimony buyouts. 

[mlnate1]

thanks for the response.  However, my question doesn't relate to the deductibility of alimony payments.  Instead, just wondering the tax implications (particularly to the recipient ex-wife) of receiving a $300K lump sum settlement in exchange for the forgiveness of the court-ordered alimony payments for life.

[Opus 17]

Assuming the payments are considered alimony, the entire amount would be taxable to the recipient in the year received.

I think that, by relieving the spouse of future responsibility, there is a chance that the payment would not be considered alimony.  That's why we are suggesting you follow up with a CPA, enrolled agent, or tax attorney. 

The payor and the recipient have the option, of declaring in the written settlement, that the payment is "not alimony" and is not deductible by the payor and is not income to the recipient.   If you want it to not be alimony, put that clearly in writing.   However, if you want the settlement to be alimony, and to be deductible by the payor, then it has to be equally taxable to the recipient, and that's where you may want specialist advice.  

[Opus 17]

Just to be clear:

If you want it to not be alimony, put that clearly in writing in the settlement agreement.  The payment will be treated as a property settlement pursuant to a divorce, and is not taxable to the recipient and is not deductible to the payor.

If you want it to be alimony, then it would be deductible by the payor and taxable to the recipient.  You should have the situation reviewed by your own expert, because there is a chance it might be disallowed as alimony.  And, because of the large amount paid as a lump sum, there could be tax disadvantages for both parties (e.g. not be fully deductible to the payor, and would push the recipient into a higher tax bracket that could have a ripple effect on social security, medicare premiums, and other things).  

[mlnate1]

Thanks again for the response.  This transaction will NOT be considered alimony.  In that case, what are the taxable consequences to the recipient ex-spouse?  Is it considered 

1.  a non-taxable gift?

2.  a non-taxable exchange with equal value to each party (i.e. prepayment of 10 yrs of court-ordered alimony in exchange for forgiveness of all remaining obligations under court-ordered divorce settlement?

3.  fully taxable income in the amount of $300K to recipient ex-spouse.

Thoughts?

[Opus 17]

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@mlnate1 wrote:

Thanks again for the response.  This transaction will NOT be considered alimony.  In that case, what are the taxable consequences to the recipient ex-spouse?  Is it considered 

1.  a non-taxable gift?

2.  a non-taxable exchange with equal value to each party (i.e. prepayment of 10 yrs of court-ordered alimony in exchange for forgiveness of all remaining obligations under court-ordered divorce settlement?

3.  fully taxable income in the amount of $300K to recipient ex-spouse.

Thoughts?

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None of the above. It is a property settlement pursuant to a divorce.  There's no need to argue "equal value" or anything else.  It's not a gift so no gift tax return is required.   Division of property (money, assets, etc.) as part of a divorce are not taxable or deductible by either party.  

[mlnate1]

Excellent response.  Much appreciated!