Allowance for upkeep allowance for medical insurance premiums earned with pre-tax wages

On first impression, the tax court dismissed the IRS’s objection to the taxpayer’s deduction of alimony from pre-tax health insurance premiums to cover a separate Spouse.

Facts: Charles and Cynthia Leyh split in Pennsylvania in 2012 and signed an agreement to divorce in 2014. Charles Leyh promised Cynthia Leyh alimony until the final divorce. As part of the deal, he paid for her health and eyesight Insurance.

In 2015, Charles Leyh paid $ 10,683 for Cynthia Leyh’s health insurance premiums as pre-tax salary cuts through his employer’s canteen plan. On his 2015 Form 1040, US Individual Income Tax Return, Leyh excluded the total amount of health insurance premiums he and Cynthia Leyh received through the canteen plan, using the separated marriage status, and requested a $ 10,683 alimony deduction for the premium payments on Cynthia Leyhs in the name of.

After a 2015 audit of Charles Leyh’s return, the IRS denied his child support deduction, finding an income tax deficiency of $ 3,770 and an income tax deficiency of $ 754. 6662 (a) accuracy–connected Punishment. Leyh applied in good time to the tax court to re-establish the defect and Punishment.

Issues: One question was whether Leyh asserted an inadmissible “double deduction” by deducting the health insurance contributions of his spouse, which were paid to him as compensation but excluded from his gross income, as maintenance payments that the tax court did not have until now taken into account.

If an employee has health insurance for the employee and / or the employee’s spouse as a benefit through a employer–Sponsored Health insurance, the premiums paid for coverage can in principle be excluded from the gross income of the employee (Sections 106 a) and 125 a; Reg. § 1.125–1(h) (2)).

In general, prior to repeal by the law known as the Tax Cuts and Jobs Act (TCJA), PL 115–97, the amounts received as maintenance income in the year of receipt and were deductible by the payer in the same year (formerly Sections 71 and 215). The TCJA raised secs. 71 and 215 in relation to certificates of divorce or separation issued after December 31, 2018 (or modified after that date to apply the change). Therefore, the TCJA did not apply to the agreement Output.

The IRS argued that allowing Leyh the alimony deduction would create a “windfall” by granting him the practical equivalent of multiple deductions. It also argued a second point that Sec. 265 prohibits deductions for amounts based on VAT–exempt income.

Holding: The tax court ruled that Leyh was entitled to deduct the premiums as alimony. The court found that Leyh had received health insurance compensation while the parties were still married, as Pennsylvania law only recognizes divorce, not separation. The final divorce decree was not issued until 2016. Therefore, the Leyhs could have submitted a joint return in 2015 and circumvented the maintenance regulation. Cynthia Leyh would then not have to include any part of the maintenance payments in her income. However, since they had to include them, the court argued, the matching principle of the alimony regime allowed Charles Leyh to do so Deduction.

In response to the IRS’s Windfall argument, the court stated that there was no risk of co-compliance and that denying the deduction would result in a higher tax burden for Leyh, which was contrary to the purpose of the maintenance scheme to shift the burden on the maintenance recipient. Regarding the Sec. 265 argument, the court stated that it was not aware of any case in which an alimony deduction was denied on that basis and that as Cynthia Leyh was required to include alimony in her income, it did not fully deduct the alimony VAT–freed income Per Sec. 265 Purposes.

“Neither the double deduction common law nor Section 265 applies to prevent alimony deduction when a separated couple enters into a maintenance agreement pending a final divorce judgment that includes continued health coverage provided by the paying spouse’s employer will, premiums for which are duly excluded from the gross income of the payer and included in the gross income of the receiving spouse “, the court concluded (Slip op. 14-15).

– By Maria M. Pirrone, CPA, LL.M., and Joseph Trainor, CPA, Ph.D., CFE, both Associate Professors of Accounting at St. John’s University, Queens, NY