When divorce occurs, one ex-spouse is often obligated to make continuing payments to the other spouse. However for the payments to be deducted by the payer, they must meet the tax-law definition of alimony.
For any particular payment to qualify as deductible alimony for federal income tax purposes and meet the tax law definition of alimony, all the following requirements must be met:
1. The payment must be made pursuant to a written divorce decree or separation instrument such as a temporary support order.
Note that payments made in advance of signing a written divorce or separation instrument or before the effective date of a court order or decree cannot be deductible alimony. Such payments are considered voluntary and are therefore nondeductible. The same is true for payment of amounts in excess of what is required under a written divorce decree or separation instrument.
2. The payment must be to or on behalf of a spouse or ex-spouse. Therefore, payments to third parties, such as attorneys and mortgage companies, are okay if made on behalf of a spouse or ex-spouse and pursuant to a divorce decree or separation instrument.
3. The divorce decree or separation instrument must state the payments are alimony.
4. After divorce or legal separation (meaning the couple is considered divorced for federal income tax purposes), the ex-spouses cannot live in the same household or file a joint return for the year they separated or thereafter.
5. The payment must be made in cash or cash equivalent such as check or money order.
6. The payment cannot be fixed or deemed child support in the divorce decree.
Fixed child support simply refers to amounts designated as such in the divorce or separation instrument, so it’s easy to identify. Payments are considered to be deemed child support if they are terminated or reduced by any of the following so-called contingencies relating to a child:
a. Attaining the age 18, or the local age of majority.
d. Completion of schooling.
e. Leaving the ex-spouse’s household.
f. Attaining a specified income level.
7. The payer’s return is required to include the recipient’s social security number.
8. The obligation to make payments (other than payment of delinquent amounts) must cease if the recipient party dies. If the divorce decree is unclear about whether or not payments must continue, state law controls. If under state law, the payer must continue to make payments after the recipient’s death, the payments cannot be alimony. Therefore, to avoid problems, the divorce decree should always explicitly stipulate whether a payment obligation continues to exist after the death of the recipient party. Failing this test is probably the most common cause for lost alimony deductions.
What happens when payments to an ex-spouse fail to meet the tax-law definition of alimony? They are generally treated as either child support payments or as payments to divide the marital property (equitable distribution). Both types of payments are nondeductible personal expenses for the payer and tax-free income for the recipient.
Since payments to ex-spouses are often substantial, the issue of whether the payer can deduct them is often substantial too. Therefore, it is very important to consult a tax attorney like Gregory J. Spadea before signing the divorce decree. You can reach him at Spadea & Associates, LLC in Ridley Park at 610-521-0604.