In this week’s blog, we review the U.S. tax rules relating to the payment of alimony, both from a domestic law and a treaty law perspective.
As we explain below, the treatment of alimony changed significantly under the Trump Reform, so the rules will vary significantly depending on when the divorce happened.
Alimony – In general
The Internal Revenue Code and IRS guidance define alimony for tax purposes as amounts paid to a former spouse under a divorce instrument, such as a divorce decree.
A payment is alimony if the following further requirements are met:
- The spouses don't file a joint return with each other;
- The payment is in cash (including checks or money orders);
- There's no liability to make the payment (in cash or property) after the death of the recipient spouse; and
- The payment isn't treated as child support or a property settlement.
Tax treatment of Alimony – Domestic Law
Prior to the Trump Reform in 2018, alimony payments were deductible by the payor spouse and includible in income by the recipient spouse.
Pursuant to the reform, the treatment now depends on when the divorce was executed. Alimony payments are deductible by the payer spouse and includible in the recipient spouse's income if paid under a divorce executed before 2019.
In contrast, for any divorce executed after 2018, or executed before that date but modified after it (if the modification expressly provides that the new law applies), alimony payments are not deductible by the payor spouse and are not included in the income (or reportable on the return) of the payee spouse.
Tax Treatment of Alimony – Treaty Law
In the case of divorcees, one of whom lives in the U.S., and one of whom lives in a treaty country (i.e., a country that has an income tax treaty with the United States), the tax treatment of alimony payments can vary depending on the provisions of the relevant treaty.
Since alimony payments are no longer includible in gross income under U.S. domestic law, as explained above, treaty provisions have become less relevant for U.S. tax purposes, but they’re still important to consider for divorces executed before 2019.
Most recent U.S. income tax treaties specifically provide for the treatment of alimony. The OECD Model and U.N. Model Treaties, however, do not expressly address alimony.
Generally, under the alimony articles in most U.S. income tax treaties, alimony is subject to tax only by the State where the recipient is resident, although there are exceptions (notably, under the UK treaty, alimony payments are not taxable by either country, unless the payments are deductible, in which case, the payments are taxable only by the state of residence).
The alimony article is typically subject to a treaty's saving clause (i.e., the clause which taxes U.S. citizens as if the treaty was not in effect), but there are exceptions (notably, the UK and Australia).
A number of treaties do not specifically address alimony. In the case of some of such treaties (e.g., Hungary, New Zealand, and Russia), official documents accompanying the treaties indicate that such payments were intended to be covered under the Other Income article, which typically allows only the state of residence to tax.
Given the varying treatment, each treaty should be carefully analyzed to understand its application to any given set of facts.
