Volume A2, Issue 2007

One topic that sometimes doesn't get enough attention early in the divorce process is the matter of alimony. Whether a divorcing couple wants payments from one former spouse to the other to be characterized as alimony — which will be deductible by the paying spouse and taxable to the recipient — should be near the top of the list of considerations dealt with in divorce negotiations.

What Constitutes Alimony?

Essentially, the law now provides that payments to a former spouse will be considered alimony only if they:

In addition, the former spouses cannot be members of the same household when the payments are made. Voluntary payments will not qualify as alimony and might even be considered taxable gifts.

Payments to a third party rather than a former spouse may be considered alimony under appropriate circumstances. Examples of payments that could fall in this category include payments of rent, a mortgage, utilities, and medical costs for a former spouse.

Child Support

Payments for child support are not deductible by the payor nor are they includable in the income of the recipient. Couples should be very clear when labeling payments as alimony or child support in a divorce agreement.

Front-loading of Alimony

The tax law includes special "front-loading" rules to prevent payments from being deducted as alimony when they are actually disguised property settlements. These rules provide for the recapture (as income) of "excess amounts" that have been treated as deductible alimony, with a corresponding deduction by the recipient who previously included the amount in income.

Taxes Matter

Depending on the tax brackets of the divorcing spouses and the amounts involved, the question of the classification of payments as alimony can have a significant effect on the future finances of the individuals involved.