Divorce: alimony advance payment

[Lion]

Had a client call. She gets $120,000 alimony for several years. Wants to sever all ties to ex and asked him to pay her a lump sum now to cover the rest of the alimony. She went to a lawyer that said it would be a divorce settlement, and settlements aren't taxable. Huh? I told her to ask him how he's going to structure the payment(s) and to cite the tax code so I can see how (if?) it will be taxed. I remember something about alimony increasing or decreasing substantially possibly changing the character of the payments. Anybody know what this lawyer is talking about when he calls it a "settlement"? Know where to send me in the code to research? Thanks.

[dmj4]

Don't you love Lawyers?

Is the divorce already final with the property settlement already completed?

If so, it seems to me "Alimony" should have been awarded by the Judge. Unless, the state has a provision that allows all lump sum payments to be considered as a settlement, I would think it would still be alimony unless the Judge decides it is a "settlement". It also seems that the ex-husband's attorney would attempt to block the amount being classified as a settlement instead of alimony, if it doesn't meet state law or a Judge doesn't sign off on it.

[jimmcg]

Payments under a divorce decree are categorized into three types by the Code, namely alimony payments, child support payments, and payments in settlement of property claims. Each are included or excluded in taxable income under different rules. First determine the category the payments fall in by obtaining and reading the legal instrument issued by the court, then apply the appropriate rules to the amounts. As to your comment relative to "front end loading" of the alimony payments, these fall under the "alimony recapture" rules which are an exception to the general alimony rules. I have not checked but assume the TaxBook covers it fairly well. As to the attorney's comment, ignore it. You are the tax expert.
Read Code Sec 71(f) for recapture rules and Sec 71 in general for statutory alimony requirements.

[OtisMozzetti]

Alimony is adjustment to income for payer

Alimony is deductible, as an adjustment to income, for the payer. Too much of a deduction in one particular year is likely to be much less helpful for the payer. A property settlement isn't deductible at all as alimony.

[Lion]

Divorce final

Yep, the divorce was final a few years ago. Even the property settlement has been finalized with the sale of their home (which took a couple of years) and the appropriate split of the profits. They had the property to divide, and she gets $10,000/month since the sale of the house for a set number of years as "unallocated support" for her to support herself and her children. Hubby didn't turn off his cell after calling her recently, so she heard him have two separate conversations with visitors to his office where he said he wanted to kill his ex-wife. She wants to take the money and run. He told her to name a number. She went to this new lawyer who said she won't be taxed on the $600,000 or so divorce "settlement" she hopes to get. When I told her how much she'll pay in taxes, she was angry with me, saying she won't have enough to invest to live off the income to support her sons and herself, blah, blah, blah. And, I had read the Tax Book page on alimony before posting. Alimony will drop after her proposed lump sum, but it will be more than three years after the original divorce decree; so I printed out Pub. 504.

[Lion]

Thank you, all

And, a big thank you to all of you for helping guide my thinking and research on this (and countless other topics, as well).

[Burke]

You gotta love this business. I always swore I would write a book when I'm done. You couldn't make this stuff up.

[Roberts]

are you sure

Are you sure this isn't recapture? Alimony must strictly be paid out in a timely schedule the judge approved. There are very strict rules that if you increase or decrease the alimony too much, it can be reclassified as child support or as a deferred property settlement. Be very careful.

For example, alimony paid for the next 15 years that is scheduled to decrease in 10 years may subject a significant portion to child support reclassification if a child turns the age of majority near that 10 year mark.

Be very careful because the attorney made the comment for a reason and if they are a divorce attorney, they are required to review these rules against ANY settlement.

[S T]

A little research

I also did a little research on the Original Post, and found that a look at the State Laws are important, as each State has it's own rulings on how to treat Lump Sum Alimony/Spousal Payments.

Possibly warrants a conversation with the Attorney to find out exactly what they are thinking or proposing instead of what the tax client is telling you. Unfortunately there are legal issues and then there are Tax Issues.

Sandy

[Lion]

Recipient

My client is the recipient of alimony. She'd be thrilled if some of the prior years' payments would be reclassified as child support. She'd "recapture" a whole lot of taxes paid. I asked her to bring me the lawyer's statement re how he will structure her lump-sum alimoney or to call me to explain it to me, as well as including cites to the law. I'm not going to worry further about the what-ifs until I hear what she will actually receive and when. Her sons are teenagers; I've warned her about child support ending when each one turns 18. I'm not her lawyer and not getting paid anyplace near his hourly rate, so it's time for her to talk to him and not to me. I'm going to wait until he shares his research (probably the research of his paralegal) with me. Thank you, everyone, for your thoughts on this.