Generally alimony paid by a U.S. citizen or resident of the U.S. to a non-resident Alien is U.S.-source income, deductible by the payor and reportable by the recipient. Because alimony is considered “Fixed or Determinable Annual or Periodical” income (“FDAP”), the IRS requires the payor to withhold 30% of the gross payout and pay this amount over to the U.S. Treasury.
Many tax treaties, however, provide for an exemption from withholding for alimony payments that may change the above result. The UK- U.S. Tax Treaty is an example of that and provides a specific provision related to alimony payments between parties of both countries.
Article 17 of UK- U.S. Tax Treaty states that “Periodic payments, made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support, including payments for the support of a child, paid by a resident of a Contracting State to a resident of the other Contracting State, shall be exempt from tax in both Contracting States, except that, if the payer is entitled to relief from tax for such payments in the first-mentioned State, such payments shall be taxable only in the other State.”
The Technical Explanation of the UK- U.S. tax treaty explains that Article 17 exempts from tax in both Contracting States such payments made by a resident of one of the Contracting States to a resident of the other Contracting State, unless the payments are deductible in the payer’s State of residence. Deductible alimony payments made by a resident of a Contracting State to a resident of the other Contracting State are taxable, exclusively, in the recipient’s State of residence.
We then have that in a case of alimony paid by a U.S. person to a UK person, the payment is exempt of tax in both countries unless the payor deducts the alimony payment in his country then it would be taxable by the recipient in the other country.
There are other considerations associated to this analysis such as tax compliance and reporting claiming the tax treaty benefits, withholding reporting, and tax planning. For further information on this topic please contact Christopher J. Byrne at (212) 239-1931