The Taxpayer Relief Act of 1997 has provided significant changes to
the income tax map for individuals and businesses. Some changes which affect the
arena of separation and divorce are as follows:
The sale of a home is easier due to a new exclusion for capital
The dependency exemption is more valuable because three new
credits and a deduction are tied to it.
The lower capital gains income tax makes property with a low
basis more valuable.
New IRA rules can make it easier to utilize IRA funds for
alimony and equitable distribution.
The foregoing changes are incorporated in the following materials.
Alimony, Spousal Support and Separate Maintenance Payments.
The Pennsylvania Divorce Code provides that tax consequences
of an alimony award are one of the seventeen factors to be considered in
determining alimony. 23 Pa.C.S. ß3701(b).
Apparently, in accordance with the court’s holding in Dubin v.
Dubin, 372 Pa. Super. 84, 538 A.2d 1362, 1363 (1988), regarding allocation of
spousal support and child support, the Supreme Court has promulgated Rule
1910.16 providing that:
In an order awarding child support and spousal support,
the court may on its own motion or upon the motion of either party
make an unallocated award in favor of the spouse
and one or more children, or
state the amount of support allocable to the spouse
and the amount allocable to each child.
An unallocated order in favor of the spouse and one or
more children shall be a final order as to all claims covered in the order.
The 1981 Rules neither endorsed nor discouraged allocation,
although they recognized that allocation had impact on two substantive areas:
federal income taxation and subsequent modification of the order. “With respect to
taxation, the allocation will determine which party pays the federal income tax and
thus, the actual amount of money available to the beneficiary of the order. With
regard to subsequent modification of an order, the court will be able to determine
whether modification is warranted if it knows the amount of support each
beneficiary is receiving.” The 1989 Explanatory Comment to the Rule recognized
that allocation of a support order may not be appropriate in all cases, but rather it
is a determination to be “based upon the facts of the ease.” The allocation of an
order may be inequitable and inconsistent with the provisions of the Guidelines
(Rule 1910.16-1 et seq.). See Rule 1910.16-5(f), which sets forth a detailed
discussion with respect to allocation. See also Holland vs. Holland, 444 Pa. Super.
251, 613 A.2d 768 (1995).
The 1994 Explanatory Comment provided: “The decision to
allocate a support order has federal income tax consequences and an effect upon
subsequent modification of an order...Allocation of the order permits the court to
determine more easily whether modification of the order is warranted.” On the
other hand, the Guidelines assume that the order will be unallocated (taxable to
payee and deductible to payor). Rule 1910.16-5(f). Allocation is generally the
exception rather than the rule.
An unallocated support or alimony pendente lite order for
spouse and children is fully income taxable to the payee and income tax deductible
to the payor. An order for child support is not taxable to the payee or deductible to
the payor. Therefore, the tax considerations must not be overlooked when the
parties are in higher income brackets. Secondly, where payee’s income is equal to
or greater to obligor’s income, the support order should be for children only. The
latest revisions to the Guidelines make this consideration easier to resolve by
juxtaposition of both proposed awards.
Federal Income Taxation
Section 71 provides that “alimony or separate maintenance
payments” (“alimony”) are includable in the gross income of the recipient spouse.
Section 215 provides that alimony is deductible from the gross income of the payor
Because alimony payments are deductible to arrive at adjusted
gross income pursuant to Section 62(a)(10), the deduction is available even to those
taxpayers who do not itemize deductions. The deduction is not subject to any of the
phaseouts or limitations which apply to itemized deductions.
Alimony payments are also deductible for purposes of the
alternative minimum tax imposed by Section 55.
Payment Must be Made in Cash.
Only cash payments, including checks and money orders
payable on demand, constitute alimony. The transfer of property or services or the
use of the payor’s property does not qualify.
The payment of cash to a third party for the benefit of the
payee will qualify as alimony, but only if the payment is provided under the terms
of the divorce or separation instrument or pursuant to a written request of the
spouse which satisfies the requirements of Temp. Reg. ß1.71-1T(b) Q+A-7.
Payments to maintain property owned by the payor but
used by the recipient spouse will not be treated as alimony.
If the marital residence is owned jointly but all of the
expenses are paid by the payor, one-half of the expenses (i.e. the payee spouse’s
half) should be deductible and includable as alimony, assuming all of the other
requirements for alimony treatment are satisfied. Neither the Code nor the
temporary regulations to Section 71 cover this point.
Payment Must Be Made Pursuant to a Divorce Decree, Written
Agreement or Court Order.
A payment will not constitute alimony unless it is
received by or on behalf of the payee under a “divorce or separation instrument.”
The term “divorce or separation instrument” is defined in
Section 71(b)(2) as:
a decree of divorce or separate maintenance or a
written instrument incident thereto;
a written separation agreement; or
a decree requiring a spouse to make payments for
the support or maintenance of the other spouse.
Not Designated as Nondeductible and Excludable.
Payments which would otherwise qualify as alimony can
be designated as nondeductible and excludable, pursuant to the authority of Section
The parties may subsequently vary the tax treatment of
these payments by signing a new writing which designates the payments as
nondeductible and excludable or revoke such a designation.
The parties may elect the tax treatment of any payment
otherwise qualifying as alimony and to vary this treatment prospectively from time-
to-time, provided the designation requirements are met.
Divorced Parents are Not Members of the Same Household.
If the parties are “legally separated under a decree of
divorce or separate maintenance,” payments made when both former spouses are
members of the same household do not qualify as alimony. ß71(b)(1)(C). The
parties cannot avoid this requirement by physically segregating themselves in the
Under a limited exception to this rule, a payment made at
a time when the divorced spouses reside in the same household can qualify as
alimony if (a) either former spouse is preparing to depart from the household, and
(b) that spouse in fact departs not more than one month after the payment. Temp.
Reg. ß1.71-1T(b), Q+A-9.
This requirement applies only when the parties are
legally separated under a decree of divorce or separate maintenance. Payments
may qualify as alimony, even though the parties are still members of the same
household, in a temporary support arrangement, until the legal separation of the
parties pursuant to the decree of divorce.
Pennsylvania Support and Divorce law permits
separation under the same roof:
A court does not have the power to issue a support
order where the parties are living together in the same household unless the basic
necessities of life are not being supplied. Shilling v. Shilling, 394 Pa. Super. 154,
575 A.2d 145 (1990); Com. v. George, 358 Pa. 118, 56 A.2d 228 (1948).
Although the husband and wife lived in the same
house, they were separated so as to satisfy the requirements for an award of
support to the wife. The parties shared only limited common areas of the house
and had not spoken to each other in over a year. It was held that the lower court
did not abuse its discretion in awarding the wife support even though the husband
paid the joint household expenses since the wife had necessary expenses not being
covered by the husband. Biler v. Biler, 353 Pa. Super. 49, 508 A.2d 1263 (1986).
See Papale v. Papale, 139 P.L.J. 263 (1991).
3.23 Pa.C.S. ßß 3103 and 3301(d) define “separate
and apart” as “complete cessation of any and all cohabitation, whether living in the
same residence or not.”
No Liability to Make Payments Following the Death of the
A payment will not qualify as alimony if the payor is
required to make the payment for any period after payee’s death or if there is any
liability to make any payment as a substitute for such payment after the payee’s
Payments are Not Child Support.
Amounts which are fixed as child support under the terms
of the divorce or separation instrument do not constitute alimony. ß71(c).
Reductions in payments which occur in connection with or which can clearly be
associated with a contingency relating to a child (e.g. attainment of a specified age,
death, marriage, etc.) will be treated as having been fixed as child support.
No Joint Return Filed.
If the parties file a joint federal income tax return for a
taxable year, no payments made by the payor to the spouse in that year will qualify
Excess Front-Loading of Alimony.
Section 71(f) prescribes rules limiting the usefulness of “front-
loading” alimony payments, whereby a portion of the payor’s alimony deductions
are “recaptured” and the alimony recipient is afforded a deduction from gross
income for the excess amount.
The recapture provisions only apply to the first and/or second
“post-separation years.” No alimony payments made after the second post-
separation year will be recaptured. Any recapture of excess alimony and the
corresponding reduction for the payee occur in the third post-separation year. For
this purpose, the first “post-separation year” is the calendar year in which the payor
first makes alimony payments to which Section 71 applies, and the second and third
post-separation years are the two succeeding calendar years, as follows:
First, the excess alimony payments for the second post-
separation year are calculated. This is the amount, if any, by which alimony paid
in the second post-separation year exceeds the sum of (i) alimony paid in the third
post-separation year, plus (ii) $15,000.00.
Second, the excess alimony payments for the first post-
separation year are calculated. This is the amount, if any, by which alimony is paid
in the first post-separation year exceeds the sum of (i) the average of the alimony
paid in the second post-separation year, reduced by the excess payments for the
second post-separation year (as computed in the prior paragraph), and the alimony
paid in the third post-separation year, plus (ii) $15,000.00.
The sum of the excess alimony payments, if any, for the first and
second post-separation years, computed as described in the preceding paragraph, is
included in the gross income of the payor and deductible by the payee in the third
Section 71(f)(5) provides for the following three exceptions to the
If alimony payments cease on the death of either spouse
or the recipient’s remarriage, and the death or remarriage occurs prior to the end of
the third post-separation year.
Payments made pursuant to a Section 71(b)(2)(C) decree
(e.g. an order for temporary support) are not subject to recapture.
“Fluctuating payments” defined as those made pursuant
to a continuing liability (for a period of at least three years) to pay a fixed portion of
the income from a business, from property and/or from wages or net earnings from
self-employment, are not subject to recapture.
Worksheet for Alimony Recapture Computation:
It is recommended that the practitioner utilize the following “Recapture
Worksheet” to mechanically apply the foregoing rules:
Step 1: Calculate Recapture for Year 2
Alimony paid in year 2$________
Alimony paid in year 3 $________ plus $15,000.00 $________
Subtract line 2 from line 1
(Not less than zero) $________
Step 2: Calculate Recapture Base for Year 1
Alimony paid year 2 $________
Amount from line 3 above (Year 2 Recapture) $________
Subtract line 5 from line 4
(Not less than zero) $________
Alimony paid year 3 $________
Add lines 6 and 7 $________
Divide line 8 by 2 $________
Floor for recapture 15,000.00
Add line 9 to line 10 $________
Step 3: Calculate Recapture for Year 1
Alimony paid year 1 $________
Amount from line 11 above $________
Subtract line 13 from line 12
(Not less than zero) $________
Step 4: Calculate Total Recapture
Alimony paid year 3 __________
Amount from line 4 __________
Add line 15 to line 16$__________
Line 17 is Total Recapture Amount
Section 682 provides generally that a party who is divorced or
legally separated under a decree of divorce, separate maintenance or who is
separated under a written separation agreement and who is the beneficiary of a
trust must include in gross income the amount of trust income which that party is
entitled to receive from the trust. Otherwise, the trust income would be includable
in the income of the spouse who created the trust. The spouse who created the trust
for the other spouse’s benefit is not taxed on such income and is not entitled to an
alimony deduction under Section 215(d) for such amounts.
In general, trust income taxable to a beneficiary retains the
same character in the hands of the beneficiary as it had in the hands of the trust.
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