Divorce attorney Nicole K. Levy explores a recent tax court decision treating student loan payments as alimony.
With more and more people over the age of 40 paying student loans, divorce cases are increasingly dealing with how to allocate student loan debt for one or both spouses. Even when student loan debts were incurred before the marriage, courts in equitable division states such as Massachusetts must address the apportionment of student loan debt in the final division of assets and debts.
A recent case in a U.S. Tax Court in California addressed the divorce implications of student loan payments from a different perspective. That Court held that post-divorce payments towards a former spouse’s student loans could be classified as a form of alimony.
Husband Assumes Ex-Spouse’s Student Loan Debt in Divorce
The case, Vanderhal v. Commissioner, T.C. Summ. Op. 2018-41, involved spouses who were married in 2003 and divorced in 2011. The spouses came to an agreement on how to divide their assets and debts, and the agreement became a part of their divorce decree. Notably, in the section of the agreement titled “Division of Community Debts,” the Husband assumed his spouse’s student loan debt to Sallie Mae.
When the Husband filed his 2013 federal taxes, he claimed an alimony deduction for the payments he was making on the student loan debt. The IRS, however, disagreed, and claimed that assuming student loan debt was a part of asset distribution in a divorce, not an alimony payment, and as such could not be deducted from the Husband’s taxable income.
Alimony Versus Asset Distribution: Why the Distinction Matters
Whether student loan payments may be treated as a form of alimony has important tax implications. The current tax law, which will continue to govern divorce agreements from 2018 and earlier, as well as subsequent modifications to those agreements, allows for alimony payments to be tax deductible for the payor, and are includable as income for the recipient. (Note that this changes in 2019 for new divorce judgments, with alimony no longer deductible for post-2019 divorcees). In contrast, property settlements, division of assets and debts, and lump sum payments are neither deductible for the payor nor considered income for the recipient.
Student Loan Payments are Alimony Unless Clearly Labeled Otherwise
To determine whether student loan debt is a part of asset distribution in a divorce, or whether paying a student loan debt for your ex-spouse is a form of alimony, the tax court went to the Internal Revenue Code (IRC) to find answers. IRC § 71(b)(1) states that a cash payment is considered alimony if four requirements are met:
- It is received pursuant to a divorce or separation agreement;
- The agreement does not designate the payment as something that cannot be included as income to the recipient and deductible to the payor;
- The spouses are not living together when the payment is made; and,
- There is no requirement that payment continue to be made after the recipient spouse’s death
In Vanderhal, the only requirement in dispute was the second. Looking at the divorce decree and the agreement attached to it, the tax court found that there was ambiguity as to whether community debts – including the Husband’s payments of the Wife’s student loan debt – should be singled out as non-alimony payments. However, the ambiguity did not prevent the Court from holding that the payments were alimony.
“Nothing in the divorce decree or the agreement clearly, explicitly, and expressly designates the Sallie Mae student loan payments as nonalimony payments. Consequently, the payments on the student loan account fit within the definition of alimony,” and could be deducted from the Husband’s taxes.
While the outcome of Vanderhal sheds some light on the interplay between divorce and student loan debts, there are several important caveats to keep in mind. Vanderhal was a summary opinion issued by the tax court. Summary opinions are issued in cases involving less than $10,000 and decided is less formal proceedings than other tax disputes. Under IRC § 7463(b), these summary opinions are not precedential, meaning their rulings cannot absolutely bind a subsequent tax court facing the same issues. However, tax courts do allow summary opinions to be used to support legal arguments, and will give weight to well reasoned summary opinions, particularly when there is not any stronger precedent available.
Additionally, there is the fact that Vanderhal dealt with the old tax code, not the new overhaul that was passed in 2017. That new law will control alimony payments for divorces executed on or after January 1, 2019. For upcoming divorces, therefore, the lesson from Vanderhal can be completely irrelevant. For divorces that have already happened and for modifications to divorce decrees that were executed before January 1, 2019, Vanderhal can be a useful point to keep in mind.
Lastly, the Vanderhal decision did not address several underlying questions about student loans and divorce, such as: Should student loans debts incurred before or during a marriage be split equitably in a divorce, or should courts assign responsibility for paying a former spouse’s student loans as a form of alimony?
About the Author: Nicole K. Levy is a Massachusetts divorce lawyer and Massachusetts family law attorney for Lynch & Owens, located in located in Hingham, Massachusetts and East Sandwich, Massachusetts. She is also a mediator for South Shore Divorce Mediation.