A major tax benefit for persons paying alimony is that such payments are tax deductible to the payer, however, as the recently decided case of Johnson v. Commissioner of Internal Revenue demonstrates; there are serious pitfalls if an alimony termination event is linked to a “child achievement milestone.” In Johnson, the parties negotiated that alimony would be payable until the death of either party, Ms. Johnsons’ remarriage or their child’s high school graduation, whichever first occurred. The first two termination events were fine; however, the “graduation” clause was enough to void the tax deductibility of Mr. Johnson’s payments despite his argument that such language was only a “reference point” since the parties’ Agreement contained separate child support provisions. Rejecting Mr. Johnson’s claim, the Tax Court held that his payments were really “child support” and therefore not tax deductible.
Over the years I have seen Marital Settlement Agreement containing alimony termination clauses linked to a child reaching a certain age or graduating from high school or college. Such Agreements are ticking time bombs. If the alimony payments are declared non-deductible, the result is very damaging since the tax deduction is claimed “above the line;” that is, before calculating adjusted gross income. For someone in a thirty five percent tax bracket, he or she only pays “sixty five cents on the dollar” due to the deductibility feature. In an era when alimony payments are often thousands of dollars per month, the loss of tax deductibility is very serious. In this author’s opinion, it is incumbent on divorce attorneys to be knowledgeable and important for divorcing persons to be aware of such matters.