Alimony or not?

[DaveO]

I have a new situation here. Client is under exam for failing to report alimony received. It appears that the clerk of the court messed up on the accounting. The courts took over the administration of alimony and child support here a few years back. When this account was set up the separate maintenance and alimony previously paid was shown as not paid creating an arrearage that did not really exist.

The payments were to have dropped by $200 per month after two years but since this phantom arrearage was on the books the clerk continued to levy the higher amount out of the payer’s account and pay it over to the payee. No one noticed or complained about until an audit came up. Now the auditor is asserting the extra $200 per month is alimony to the recipient. My position is the only amount that can be alimony is the amount called for in the decree and the extra $200 per month is not includable in her income.

Any thoughts? Cites?

[Jesse]

I have a new situation here. Client is under exam for failing to report alimony received. It appears that the clerk of the court messed up on the accounting. The courts took over the administration of alimony and child support here a few years back. When this account was set up the separate maintenance and alimony previously paid was shown as not paid creating an arrearage that did not really exist.

The payments were to have dropped by $200 per month after two years but since this phantom arrearage was on the books the clerk continued to levy the higher amount out of the payer’s account and pay it over to the payee. No one noticed or complained about until an audit came up. Now the auditor is asserting the extra $200 per month is alimony to the recipient. My position is the only amount that can be alimony is the amount called for in the decree and the extra $200 per month is not includable in her income.

Any thoughts? Cites?

Did the client actually receive the extra $200? Was it "repaid" in the current or different tax year?

[DaveO]

She did get it and did not repay it. Don't know if the "ex" deducted the amount or not.

[Gary2]

My position is the only amount that can be alimony is the amount called for in the decree and the extra $200 per month is not includable in her income.

I worry that the alimony question is a red herring. Just because it may not qualify to be labeled "alimony" doesn't mean it's not taxable income. It's not a gift, because it wasn't paid with the intention of being a gift. Presumably it's not child support for the same rationale that you say it's not alimony. There might be some other argument for excluding it from income, but I don't see one off the top of my head.

What pops into my mind is to pay it back, pay the back taxes, and then take a credit for it as a claim of right (assuming the total paid back is more than $3K; I'm not sure if the $3K limit only applies to the total paid back or must be done separately for each year in which it was received). The problem with this is that it doesn't recover the late payment penalties and interest on the back taxes. The P&I might be small enough to not be worth arguing.

[David1980]

I can't see any argument for it being child support. I doubt /gift/ is the right classification. I think it's income of some sort.

[Roberts]

What exactly did the judge / court order to be paid in alimony?
What did the client receive?

[DaveO]

The judge ordered $1000 per month for 2 years then $800 per month for 4 years. She received $1000 per month for all 6 years. The money was taken out of the ex's bank account by the court and direct deposited into her account. The court didn't take over until the second year. At that time they showed an arrearage of over $12,000 that did not exist. All payments were timely. My positon is the correct amount of alimony is $9,600 per year, the amount called for in the decree. The auditor is claiming the correct amount is $12,000 the amount she actually received. The account from the clerk of court clearly shows only $800 was due but that $1000 was paid due to the phantom arrearage on the books. The ex-husband either didn't notice, didn't care or had failed to read the decree.

[dodgedipduck]

Part of the definition of alimony in the regs is that the payment must be made "pursuant" to a divorce decree.

The extra $200 payments weren't made pursuant to a divorce decree. The payments were made pursuant to an administrative error.

It's literally no different than me authorizing a company to withdraw $600 from my bank account to purchase something, but they mistakenly withdraw $800.

They owe me $200. It's not income to them unless they keep it.

The recipient owes the money back. Whether she pays it back is irrelevant to the issue of alimony.

However, if she does not pay the money back, it is income to her. Her wealth has increased by the amount of overpayment.

[Gary2]

They owe me $200. It's not income to them unless they keep it.

The recipient owes the money back. Whether she pays it back is irrelevant to the issue of alimony.

However, if she does not pay the money back, it is income to her. Her wealth has increased by the amount of overpayment.

Unless someone has an alternative analysis, I'll stand by my position that it was income to her when received, regardless of whether she pays it back. If she does pay it back, then the question becomes which of the various claim of right remedies are available, and if more than one, which is best.

If she does pay it back, then I'd add an additional caution that there should be a paper trail acknowledging that this is repayment that is legally owed, and not merely a gift. This, in turn, creates an interesting issue for the ex. He'd presumably have to declare the repayment as income. However, we haven't been told the years in question, so if they happen to be closed to him, he has no remedy for deducting them in the year they were paid. That seems unlikely, but could occur if the client either filed with an extension or agreed to an extension as part of the audit. In any event, the ex's tax situation is only indirectly related, insofar as it might affect any necessary negotiations.

[Burke]

I agree with Gary. While she definitely owes it back to the ex-spouse, it would have been taxable income to her in the year(s) received, just as if it were wages or Soc Sec or pension or anything else that was taxable income under these circumstances. As you describe it, it does not appear to me that it could be construed as an overpayment of child support. She might have a deduction for the overpayment in the current year IF she pays it back. And if the ex-spouse deducted the amt he actually paid as alimony, then the repayment would be income to him in the year repaid.

[Jesse]

I agree with Gary. While she definitely owes it back to the ex-spouse, it would have been taxable income to her in the year(s) received, just as if it were wages or Soc Sec or pension or anything else that was taxable income under these circumstances. As you describe it, it does not appear to me that it could be construed as an overpayment of child support. She might have a deduction for the overpayment in the current year IF she pays it back. And if the ex-spouse deducted the amt he actually paid as alimony, then the repayment would be income to him in the year repaid.

I agree too, she received the money as alimony. Sometimes irregular payrolls, time off, or other various reasons the alimony paid is not the same from month to month and therefore differs from the divorce decree. This is why I try to have the taxpayer get an actual print out from the county of the actual payments made and go by that. Some years it is less than what the decree states and in the "catch up" years it is more. Of course I could be incorrect but I can't recall a case that more was paid in error and not as "catch up".

One way to look at it is if she does end up keeping the extra, she is still ahead even after paying taxes.

[Roland Slugg]

Even though the amounts received in years 3 through 6 exceeded the payer's legal obligation, the payments were still received under a court ordered divorce decree. Hence, the full amount received was taxable each year when received. If the recipient repays the excess, it will be deductible in the year(s) repaid. Also, as already noted in another reply, if the repayment in any single year exceeds $3,000, then under the "claim of right doctrine" the taxpayer can recover the tax paid in earlier years if it's greater than the tax saved in the year of repayment. (Code §1341(a))

I noted with some bemusement that the recipient knew the amounts were excessive, as evidenced by the non-reporting of the excess portion on each year's tax return, but apparently didn't bring that fact to the attention to the payer or to the court's alimony administrator. I would suggest, too, that if the taxpayer paid someone to prepare those years' returns that the tax preparer may also be at risk of preparer penalties, depending on whether or not he know about this.

[Roberts]

Part of the definition of alimony in the regs is that the payment must be made "pursuant" to a divorce decree.

The extra $200 payments weren't made pursuant to a divorce decree. The payments were made pursuant to an administrative error.

I'd love to hear the final pronouncement because as a Certified Divorce Financial Analyst, this is EXACTLY how we are taught. The ex-spouse is prohibited from labeling this money alimony because it doesn't meet the parameters of the divorce decree so the receiving ex-spouse can't be forced to label it as such. That would mean double taxation. If you think the ex-wife should pay income tax on it, how do you propose the ex-husband should deduct it from his income?

If the court orders me to pay my wife in a divorce decree $1,000 per month and I pay her $2,000 per month, the $1,000 is alimony and the remaining $1,000 per month is considered part of the marital asset allocation. It is NOT a taxable sum.

It should be noted, if a person pays alimony and child support and alimony is cut the same time as a child reaches the age of majority, it is likely the IRS will classify the alimony to actually be child support. Doesn't matter what the divorce decree states.

[Gary2]

... double taxation. If you think the ex-wife should pay income tax on it, how do you propose the ex-husband should deduct it from his income?

I don't believe the double taxation is a compelling argument. If he pays his ex to watch his house while he goes on vacation, it's taxable income to her but not a deduction to him.

If the court orders me to pay my wife in a divorce decree $1,000 per month and I pay her $2,000 per month, the $1,000 is alimony and the remaining $1,000 per month is considered part of the marital asset allocation. It is NOT a taxable sum.

There's not enough info here to know what the extra $1K is. It could just be a gift. It depends on why it was paid.

But you are correct in pointing out that the ex's tax situation is more troublesome than the current client under discussion. Fortunately, that's not the OP's problem.

[DaveO]

Thanks for all the input. My position is pretty much the same as Roberts. I'll post the outcome after it works through appeals.