Tax Wording for MSA Judgment

[Libby B]

i am in CALIFORNIA

In my divorce MSA (Marital Settlement Agreement), we agreed that my ex would pay ALL TAXES due on support he paid me over the past 6 years. (Ex had been telling the IRS that he was paying me "alimony" those 6 years, although it was child support. Since I was receiving only child support, I never claimed Alimony on my taxes. Surprisingly the IRS never contacted me about it.)

However, there are now 6 years of support payments that have never been taxed. Ex asked me to "process" the taxes through my tax returns, since I had both a lower tax bracket and also I could deduct the mortgage interest from the family home. (This would lower the total taxes due over the 6 years by over $60,000).

So in our settlement agreement, we stated that I am to pay NO TAXES on any support that ex sent over the last six years. It states that ex is to pay ALL TAXES. However, it states that to determine the amount of taxes due based upon my income and deductions, I would claim the support for the last 6 years, with ex to pay the amount due, in full.

Now it is time to type up the official Judgment stating the exact language.

My attorney prepared a Judgment, wherein the support is called "child support" with the requisite IRS wording. We did this because we are worried that in the event ex does not keep his promise - that then (if the final Judgment allocated all support as "Alimony" to me) the IRS would come after me for all of those taxes.

Ex and his attorney insist support be categorized as "Alimony," since that would match what I would be calling it in my tax returns. Ex states that the Judgment cannot call it child support, if the intention of the contract is for me to file my taxes calling it "Alimony/Family Support". (The problem is that once the Judge CALLS IT "Alimony" I am immediately responsible to the IRS - while my ex only has a *promise* to me to reimburse the costs. I would have to take him to court and spend countless sums of money, only to get a Judgment that he would also ignore, etc. etc.)

My question is: Isn't it best for the Judgment to state that all payments received are "Child Support", even when the plan is that in order to reduce taxes, I will pass the income through my taxes calling it "Alimony/Family Support" - or is there a better way to do this?



Thanks for any help at all in this matter!

[tranquility]

Alimony (after 1984), is or is not includible in gross income of the recipient depending on how the divorce instrument is worded. Either you will have income you will have to pay taxes on, at your marginal rate, or he will, at his marginal rate. You will probably have a lower rate because I'm assuming you have less income.

The tax due will be your responsibility with only a contractual reimbursement promise from your husband. You are concerned because you don't trust your husband to pay you back for the taxes. Right?

So, you want to not be responsible for the tax on the income but still get the tax rate as though the income were yours, right? I don't think this is possible.

No matter how things are worded, at some point you will have one person responsible to the government for taxes. It will be taxed at that person's marginal rate. Any reimbursement will be a contractual or court ordered responsibility that does not affect the government's right to collect against the person responsible for the tax.

[LdiJ]

What you are attempting to do here is blatant tax fraud. I am sorry, but it is. Your ex has not been paying alimony, he has been paying child support, and you are attempting to put together a contract that requires you to do something that is fraudulent. Your ex has already committed the fraud by claiming the alimony on his tax returns to start with, is probably in trouble with the IRS, and now wants you to assume his problems.

I would NEVER advise a client to do something like that, and quite frankly I am appalled that any attorney would agree to that.

If your ex reniges on his portion of the agreement you will be financially ruined. On top of that the penalties and interest are going to be enormous. This goes back 6 years.

DO NOT DO THIS. Or, if you feel that you are pushed into a corner at a minimum get a consult with a local tax attorney before signing anything.

[abezon]

My guess is he'll save considerably more than $60,000 after interest & penalties!

Actually, we don't have enough information to determine if the payments were alimony or not. Alimony is any payment that is: 1) cash/check/money order, 2) required by a decree, 3) not designated as "not alimony", 4) not treated as child support. Further, the payor & payee must be living apart & cannot file a joint return, and any requirement to make payments must cease on death of the recipient. See IRC sec. 71 & Pub 504.

Congress says that all payments meeting the above criteria are alimony unless they are declared child support, or the amount paid can be linked to some 'natural' event in the child's life, like turning 18 or graduating from college, providing convincing evidence that the money was really child support. Thus, if the decree or temporary support order states that the money was child support, your ex cannot legally deduct it, whether you put the payments on your return or not. If the decree is silent, the payments might actually be alimony under the law.

Without seeing the court orders from 6 years ago, I cannot tell you if you could legitimately characterize the past payments as alimony. That said, IF you can legitimately call the payments alimony & decide to do so, make sure you have your state & federal returns/amendments prepared before signing anything & get a cashier's check for the taxes due & any penalties & interest that the IRS and CA FTB later decide to impose. These will be significant if you have not been declaring the payments as alimony up 'till now. Have a reserve equal to the back taxes themselves deposited in an escrow account. The money sits there for at least 4 years (the length of time CA has to come after you for arrears), then he gets it back with interest.

Don't amend your back taxes earlier than tax year 2003 -- earlier years are closed & if the IRS hasn't come after him before now, it can't, unless it proves fraud on his 199*-2002 returns.

Also make sure you are satisfied with how future payments will be treated. If you & he want everything called alimony, I suggest you gross up the amount so that your tax liability is built in to the payment. That way you don't have to worry about collecting from him at tax time. You also need to make sure that the amount does not change within 6 months of any child turning 18 or 21, or that payments are reduced when the kids are between 18 & 24.

You could require him to pay into a college tuition fund (sec. 529 plan) as his child support & designate all cash to you as alimony. Note: if there is a child support obligation, it must be paid in full for the year before anything can be treated as alimony. If he shorts you on the total, the CS is paid first.

Good luck.