With an ever expanding global economy and migrating workforce, it comes as no surprise that marriage and divorce transcends borders as well, creating unique tax implications for those involved. Generally, the payer of alimony is entitled to an above-the-line deduction equal to the amount paid, while the recipient is subject to tax on the alimony received. See IRC §§ 71, 215.
IRC §§ 861 and 862 cover taxation of income which is sourced from the United States or from outside the United States and the relevant tax rules. The source of alimony income is based on the residence of the payer (see Manning, T.C. Memo. 1979-146, aff’d, 614 F.2d 815 (1st Cir. 1980). When the payer is a U.S. citizen, it falls under the rules of IRC §§ 871(a)(1) which imposes a 30% tax on income received by a nonresident alien from sources within the United States, other than capital gains. Therefore, to ensure that the appropriate amount of tax is remitted, a U.S. citizen paying alimony to a nonresident alien must withhold 30% of the payment. A U.S. citizen paying alimony to a nonresident alien from U.S. source income serves as the withholding agent[1] and is subject to the withholding agent liability, meaning if the U.S. citizen fails to withhold the appropriate amount of tax, they will be liable for the amount that was not properly withheld. Tax treaties may reduce the withholding amount required. In such instances where a tax treaty applies, the payer should receive a W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), from the recipient. The payer must also file Form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons by March 15th of the following calendar year.
In a case where 30% should have properly been withheld but was not, the nonresident recipient must file a Form 1040NR U.S. Nonresident Alien Income Tax Return and pay the appropriate tax remaining. Likewise, if 30% was withheld but a lower rate should have applied, the nonresident recipient must file Form 1040NR and attach a Form 8833 Treaty-Based Return Position Disclosure under Section 6114 or 7701(b) to claim a refund based on the lower rate.
Even if the alimony is not taxable in the recipient’s country, the U.S. citizen payer is still permitted to deduct the alimony payments made to that recipient. IRS Chief Counsel Advice (CCA) 200251004. Further, if the U.S. citizen is a resident of a foreign country and the income is not U.S. sourced, then no amount need be withheld from the alimony payment and no Form 1042 is required, however, the payer may still claim a deduction on their U.S. income tax return for that payment.
[1] A withholding agent is a U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding.
