U.S. tax implications of alimony payments to U.S. nonresidents.

• Author: Whittall, Rob

Global business affects more than just the economies of the world. As more businesses expand into the global economy, more members of the workforce are being relocated from their home countries. Consequently, more people are marrying people from different countries, and with more marriages come more divorces. Along with the emotional and financial stress, divorces have tax consequences.

This item explains the tax implications for the payers and recipients of alimony from an international perspective.

General Rule

When a U.S. resident makes an alimony payment to a U.S. resident recipient, the payer is allowed an above-the-line tax deduction (Sec. 215) in the year of the payment, and the recipient is taxed on the alimony income (Sec. 71) in the year of receipt.

What Is Alimony?

Under Sec. 71, for a payment to be classified as alimony, it must be made under a written divorce or separation instrument and meet all of the following requirements:

* The payment must be in cash or cash equivalents;

* The divorce or separation agreement does not designate that the payment is not alimony under the Code;

* For payments made after the divorce or legal separation is final (the couple is no longer married for tax purposes), the payer and payee cannot be members of the same household at the time the payment is made;

* The payment is made to (or on behalf of) a spouse or former spouse;

* The payer's obligation to make payments must be relieved upon the recipient's death;

* The payer and the payee do not file a joint return with each other; and

* The payment cannot be explicit or disguised child support.

Obviously, it should be relatively easy to determine whether the above requirements are satisfied in the case of a U.S. divorce or separation agreement. But they may be more challenging to meet in the case of a foreign divorce or separation agreement.

Tax Implications for a U.S. Citizen Who Is a U.S. Resident, Paying Alimony to a Nonresident

For the purposes of this item, it is assumed that the recipient of the alimony payment is a U.S. nonresident.

The source of the alimony income is based on the residence of the payer spouse (see, e.g., Manning, T.C. Memo. 1979-146, aff'd, 614 F.2d 815 (1st Cir. 1980), and Housden, T.C. Memo. 1992-91). Therefore, if the payer is a U.S. resident, the alimony is considered U.S.-source income.

Under Sec. 871(a)(1), the payer is required to withhold tax on the alimony payment at a 30% rate, unless the recipient provides the...