A couple got divorced in Nevada in 2011. Their agreement provided for tax-free transfers of property as well as spousal support. One spouse made payments on the other’s Sallie Mae student loans and claimed an alimony deduction for them. The IRS said the payments didn’t fit the definition of alimony. But the Tax Court disagreed with the IRS (Jeremy Adam Vanderhal, TC Summary Opinion 2018-41).
While property settlements incident to divorce are not taxable (nor deductible), payments can be taxable alimony deductible by the payer if the following conditions are met:
The IRS argued that the student loan payments were not alimony because they fell under the agreement’s paragraph on “Tax Free Transfers.” But the court pointed out that there is no reference in this paragraph to debt; the paragraph only refers to property. Because of this, and the fact that the payments met all the other terms for alimony treatment, the spouse’s payoff of student loans was deductible.