John and Mary were divorced in 2012. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child’s 18th birthday. During 2013, John paid $7,000 directly to Mary and $3,000 to Spring College for Mary’s tuition. What amount of these payments should be reported as income in Mary’s 2013 income tax return?
a. $ 5,600
b. $ 8,000
c. $ 8,600
d. $10,000
Answer:B
The requirement is to determine the amount of payments to be included in Mary’s income tax return for 2013. Alimony must be included in gross income by the payee and is deductible by the payor. In order to be treated as alimony, a payment must be made in cash and be received by or paid on behalf of the former spouse. Amounts treated as child support are not alimony; they are neither deductible by the payor, nor taxable to the payee. Payments will be treated as child support to the extent that payments will be reduced upon the happening of a contingency relating to a child (e.g., the child attaining a specified age, marrying, becoming employed). Here, since future payments will be reduced by 20% on their child’s 18th birthday, the total cash payments of $10,000 ($7,000 paid directly to Mary plus the $3,000 of tuition paid on Mary’s behalf) must be reduced by 20% and result in $8,000 of alimony income for Mary. The remaining $2,000 is treated as child support and is not taxable.