Alimony deduction and income exclusion allowed for insurance premiums.

• Author: Beavers, James A.

A taxpayer, who was required under a 2014 settlement agreement incident to divorce proceedings to pay health insurance premiums for his wife during the period before their divorce was final, was allowed to exclude the premiums (which were paid by his employer through a cafeteria plan) from gross income and also take an alimony deduction for the amount of the premiums paid.

Background

In 2012, Charles Leyh, filed for divorce from his then wife, Cynthia. The couple filed and signed an agreement in 2014 incident to their divorce proceeding in which Charles agreed to pay Cynthia alimony pendente lite until the final divorce decree was granted. As part of the 2014 agreement, Charles agreed to pay for Cynthia's health and vision insurance in 2015, and during 2015 he paid $10,683 for Cynthia's health insurance premiums pretax through his employer's "cafeteria plan." On his 2015 Form 1040, U.S. Individual Income Tax Return, he excluded from his gross income the total amount of health insurance premiums paid through his employer's cafeteria plan. Because he was required under the 2014 agreement to provide health insurance to Cynthia prior to a final divorce decree being granted, he also claimed an alimony deduction for the amount of the premiums his employer paid for Cynthia's health insurance.

On examining Charles's return, the IRS took exception to the alimony deduction for the health insurance premiums paid, finding that it constituted an impermissible double deduction because Charles also excluded the health care premiums from gross income. The IRS therefore issued a notice of deficiency disallowing Charles's deduction for the alimony payments and imposed an accuracy-related penalty. Charles filed a petition in Tax Court challenging the IRS's determination.

The Tax Court's decision

The Tax Court held that Charles could take an alimony deduction for the amount of the health insurance premiums paid for Cynthia through his employer's cafeteria plan before he and she were granted a final divorce decree. Due to nature of the alimony deduction under Sec. 215, the court concluded that taking the deduction did not give rise to an impermissible multiple-deduction scenario.

If a taxpayer pays alimony under Sec. 71(b) pursuant to a divorce or separation agreement executed or modified before 2019, under Sec. 215 the taxpayer may take a deduction for the alimony paid if it is includible in gross income of the alimony recipient under Sec. 71. However, as the...