37.2 Decree or Agreement Required
Alimony, to be deductible and taxable, must be required by one of the following divorce or separation instruments: (1) a decree of divorce or legal separation; (2) a written separation agreement; or (3) a decree of support. Voluntary payments are not deductible or taxable.
Divorced or legally separated.
The obligation to pay alimony must be imposed by the decree of divorce or separate maintenance or a written agreement incident to the divorce or separation.
Alimony paid under a Mexican divorce decree qualifies. Payments under a Mexican or state decree declared invalid by another jurisdiction do not qualify according to the IRS. Two appeals courts have rejected the IRS position.
Table 37-1 Key to Alimony and Marital Settlement Issues
| Item— | Comments— |
| Alimony | The same rules determine whether alimony is deductible and taxable. For example, if a husband makes deductible alimony payments to his ex-wife, the payments are taxable to her. He may not deduct payments that are not taxable to her. If you are currently planning an alimony agreement, consider the tax consequences to both spouses. If the spouse likely to make the payments is in a significantly higher tax bracket than the recipient spouse, and keep in mind that in the next few years the top rate may be increased above the current top rate of 35%, there may be a significant tax savings for you as a couple in negotiating an agreement that qualifies the payments as alimony deductible by the payer and taxable to the recipient (37.1). Note: Prior tax rules that apply to pre-1985 agreements are not discussed in this chapter. If you have a problem involving a payment of alimony under a pre-1985 agreement, refer to the 2004 revision of IRS Publication 504. |
| Child support agreements | A payment fixed as payable for the support of your child does not qualify as deductible or taxable alimony (37.5). |
| Property settlements | Transfers of property between spouses that are incident to a divorce are treated as tax-free exchanges. There is no recognition of gain or loss. Future tax consequences should be considered by the spouse receiving appreciated property. When the property is sold, that spouse will be taxed on the appreciation (6.7). If this is so, that spouse may want to bargain for larger alimony payments or additional property to compensate for the projected future tax. |
| Alimony to non-resident alien | If you pay alimony payments to a nonresident alien, and you are a U.S. citizen or resident, you must withhold 30% on each payment for income tax purposes, unless a tax treaty provides for an exemption from withholding or a withholding rate lower than 30%. See IRS Publications 504 and 515 for more information. |
| Exemptions for children | Exemptions for children of a divorced couple are governed by the rules explained in 21.7. |
| Annuity or endowment policy | Funds for payments of alimony may be provided through the purchase of an annuity or endowment policy. You may not deduct payments made under the policies assigned or purchased for your spouse. For example, to meet an alimony obligation of $500 a month, you buy your spouse a commercial annuity contract. The full $500 a month received by him or her is taxable. You may not deduct these payments. |
| Retirement plans | A state court can allocate your interest in a qualified retirement plan to a former spouse in a qualified domestic relations order. The benefits are taxed to your former spouse when they are paid to her or him. Benefits paid to another beneficiary, such as a child, are taxable to you (7.12). If you are required to transfer your traditional IRA to your former spouse by the terms of a decree or instrument incident to the decree, the transfer is tax free if a trustee-to-trustee transfer is made to an IRA in your former spouse’s name, or if the name on your IRA is changed to your spouse’s name. |
| Voluntary payments in excess of required alimony | Voluntary payments in excess of required alimony are not deductible or taxable as alimony. Amending the decrees retroactively to cover an increase does not qualify the increase as deductible and taxable alimony. The increase has to be approved by the court before the increased payments are made. |
| Avoiding or limiting liability for previously filed joint returns | Even though you are no longer married, you remain liable for the tax on a previously filed joint return unless you qualify for innocent spouse or equitable relief (1.7–1.9). |
Support payments ordered by a court in a wife’s home state qualify as alimony, even though not provided for by an ex parte divorce decree obtained by the husband in another state. Similarly, payments qualified when a state court increased support originally ordered before the husband obtained an uncontested Mexican divorce.
Payments made under a separation approved by a Roman Catholic ecclesiastical board do not qualify.
When a decree of divorce or separate maintenance fails to mention alimony, payments qualify as long as they are made under a written agreement considered “incident to” the decree.
Payments made under an agreement amended after a divorce or legal separation may also qualify, if the amendment is considered “incident” to the divorce or separation. For example, the IRS agrees that a written amendment changing the amount of alimony payments is incident to the divorce where the legal obligation to support under the original agreement survived the divorce. However, payments under an amended agreement did not qualify where the original agreement settled all rights between the husband and wife and made no provision for future support. The legal obligation to support the wife did not survive the divorce and could not be revived by the new agreement.
Annulments.
Payments made under an annulment decree qualify as deductible (and taxable) alimony.
Separated from spouse.
Where a husband and wife are separated and living apart, alimony is deductible by the payer-spouse and taxable to the payee-spouse provided it is paid under either a written separation agreement or decree of support.
A decree of support.
Any court decree or order requiring support payments qualifies, including alimony pendente lite (temporary alimony while the action is pending) and an interlocutory (not final) divorce decree.
In certain community property states, payments under a decree of alimony pendente lite which do not exceed the wife’s interest in community income are neither deductible by the husband nor taxable to the wife; payments exceeding the wife’s interest are taxable to her and deductible by the husband.