Lump Sum Payment Allowed as Alimony/Spousal Support Deduction

Wife and Husband filed for dissolution of their marriage a couple years back.  Prior to their final judgment of divorce, the couple reached an agreement for a lump sum spousal support payment.  Marital Settlement Agreement called for a payment of approximately $150,000 and the final judgment incorporating the Marital Settlement Agreement was issued by the court.

The final Judgment was entered several months later and indicated that Husband had paid the lump sum spousal support by certified check.  The final Judgment stipulated a much larger number as the total lump sum spousal support payment with the following adjustments:

• Reduction for a distribution to the wife of Husband’s half of the proceeds from the sale of their home
• An addition for personal property distribution to the wife
• An addition for the wife’s payment of a personal debt of the husband
• A reduction for Husband’s payment of joint debt
• A reduction for Husband’s assumption of one of Wife’s debts
• A reduction for a transfer of Husband’s investment account.

The couple filed a joint return for the prior year reflecting deductions for the year in which the lump sum, with adjustments, spousal support payment was made.  The IRS initially disallowed the entire amount claimed and ultimately agreed to the lump sum spousal support payment as the only one that was properly deductible; the balance of the payments redistributing the couple’s debt and assets were disallowed by the IRS.

Frequently in dissolution settlement a lump sum spousal support buyout includes a number of features that are nothing more than settlement of personal property (to include cash assets such as industrial accounts and the like) and real property and as such would not be deductible as spousal support.  It is also typical that a spousal support buyout be treated as a non taxable event such that the payor does not get the typical spousal support deduction for the amount paid and the receiving spouse does not have to pay tax as it is described as a property division or settlement.  In that case the agreement itself dictates that the payment would not be a deductible for the payor nor would it be income for the payee.