Payments that meet the tax law tests for alimony are deductible if you pay them, and taxable if you receive them. Payments are not deductible by the payer unless taxable to the recipient.

You claim a deduction for deductible alimony that you pay on Line 31a of Form 1040. You deduct the payments even if you claim the standard deduction rather than itemizing deductions. You must enter the Social Security number of your ex-spouse. Otherwise, your deduction may be disallowed and you may have to pay a $50 penalty. If you pay deductible alimony to more than one ex-spouse, enter the Social Security number of one of them and provide similar information for the others on a separate statement attached to your return.

If you receive taxable alimony, report the payments on Line 11 of Form 1040. You must give your ex-spouse your Social Security number and could be subject to a $50 penalty if you fail to do so.

Transfers of property between spouses during marriage, as well as transfers incident to divorce, are generally treated as tax-free exchanges. The transferor-spouse does not realize gain or loss and the transferee takes the transferor’s basis in the property (6.7).

37.1 Planning Alimony Agreements

The first step in planning the after-tax consequences of alimony is for both spouses to recognize that they may have a common financial interest; the second is projecting future tax consequences.

For example, assume that after a divorce one spouse is to make payments to the other spouse. If tax planning is approached from the viewpoint of each spouse separately, the tax deduction is an advantage for the payer-spouse, while the payee-spouse would prefer the payments to be tax free. However, both advantages cannot be achieved, and the couple must face the reality of the tax law, which allows the payer-spouse to deduct payments only if they are taxed as alimony to the payee-spouse. The spouses must compromise by setting amounts and tax consequences that balance their interests. The projected tax brackets of the parties may be an important factor, especially where the payer expects to be in a high bracket. For example, if the payer-spouse will be in a higher tax bracket during the payout period than the payee-spouse, the tax savings that the payer-spouse receives from an agreement that qualifies the alimony as deductible by that spouse and taxable to the other spouse can conserve more of the payer-spouse’s assets while the payee-spouse receives payments.

Alimony requirements. If you agree that one spouse is to pay deductible alimony and the other spouse is to report the alimony as income, separate returns must be filed if you are still married at the end of the year, and these rules must be met:

• The alimony must be paid under a decree of divorce or legal separation, a written separation agreement or decree of support (37.2). Payments may be called alimony, spousal support, spousal maintenance, or another term required by local law.
• The agreement must provide for cash payments (37.3). A noncash property settlement is not alimony. There is no minimum payout period for annual cash alimony payments of $15,000 or less. One payment of $15,000 can qualify as deductible and taxable alimony. There is also no minimum payout period for annual alimony payments exceeding $15,000. However, recapture of alimony deductions claimed in the first or second year may occur where annual payments of over $15,000 are scheduled and paid, but in the second or third year a reduced payment is made. To avoid recapture of deductions for payments over $15,000, carefully plan schedules of declining payments within the rules discussed at 37.7.
• In providing for the support of children, a specific allocation to their support or the setting of certain contingencies disqualifies payments as alimony, so such payments are not deductible by the payer and not taxable to the recipient (37.5).
• Divorced and legally separated parties must not live in the same household when payments are made. If they live in the same household, alimony payments are not deductible or taxable. However, there are these exceptions: A spouse who makes payments while preparing to leave the common residence may deduct payments made within one month before the departure. Also, where the spouses are separated under a written agreement, but not legally separated under a decree of divorce or separate maintenance, payments can be alimony even if they are members of the same household when the payments are made.
• The payer spouse’s liability to pay alimony must end on the death of the payee-spouse. The alimony agreement does not have to state expressly that payments end on death if liability ends under state law (37.4).

Qualifying payments can be designated as “not alimony”. You may specifically state in the decree or agreement that payments that otherwise would be alimony are not. A provision stating that the payments are neither taxable to the payee-spouse (under IRC Section 71) nor deductible by the payer-spouse (under IRC Section 215) effectively disqualifies the payments from alimony treatment. A copy of the agreement that contains the statement must be attached to the tax return of the payee-spouse for each year the statement is applicable.

37.2 Decree or Agreement Required

To be deductible and taxable as alimony, payments 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.

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 parties and made no provision for future support. The legal obligation to support the former spouse did not survive the divorce and could not be revived by the new agreement.

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.

Support payments ordered by a court in a spouse’s home state qualify as alimony, even though not provided for by an ex parte divorce decree obtained by the other spouse 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.

Annulments. Payments made under an annulment decree qualify as deductible (and taxable) alimony.

Separated from spouse. Where spouses 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 spouse’s interest in community income are neither deductible by one spouse nor taxable to the other spouse; payments exceeding a spouse’s interest are taxable to that spouse and deductible by the other spouse.

37.3 Cash Payments Required

Only payments of cash, checks, and money orders payable on demand qualify as taxable and deductible alimony. Your cash payment to a third party for a spouse qualifies if made under the terms of a divorce decree or separation instrument. For example, as required by your divorce decree, you pay your former spouse’s mortgage payments and real estate taxes on a home he or she owns, as well as his or her medical costs and tuition expenses. Assuming the other alimony tests (37.1) are met, you may deduct the payments as alimony and your former spouse must report them as alimony received. Your former spouse may deduct the real estate taxes, mortgage interest, medical and tuition costs as if he or she had paid them directly, subject to the regular deduction limits.

You may not deduct payments to maintain property owned by you but used by your spouse. For example, you pay the mortgage expenses, real estate taxes, and insurance premiums for a house that you own and in which your former spouse lives. You may not deduct those payments as alimony even if they are required by a decree or agreement.

Providing services or transferring or providing property does not qualify. For example, you may not deduct as alimony your note, the assignment of a third party note, or an annuity contract.

Premiums paid for term or whole life insurance on your life made under a divorce or separation instrument qualify as deductible alimony to the extent your former spouse owns the policy.

37.4 Payments Must Stop at Death

Liability for a payment must end on the death of the payee-spouse. If all the payments must continue after the death of the payee-spouse, none of the payments, whether made before or after the payee’s death, qualify as taxable (to payee-spouse) or deductible (by payer-spouse) alimony. If some payments must continue after the payee’s death, that amount is not alimony regardless of when paid. Note that these rules do not just prevent a deduction for payments made to the payee-spouse’s estate or heirs after the payee’s death, but may also have the surprising result of disallowing an alimony deduction for otherwise qualifying payments actually made to the payee-spouse. The issue is a hypothetical one: would the payment have to be made after the payee-spouse’s death?

If the answer is yes, the payment is not deductible, regardless of when made.

The divorce decree or separation agreement does not have to specifically state that payments end at death, if under state law the liability to pay ends on the death of the payee-spouse.

To the extent that one or more payments are to begin, increase in amount, or accelerate after the death of the payee-spouse, such payments may be treated as a substitute for continuing payments after the death of the payee-spouse. Such substitute payments will be denied alimony treatment.

Attorneys’ fees. Under the laws of many states, a court award of attorneys’ fees remains enforceable after the death of the payee-spouse, thereby disqualifying a payer’s alimony deduction for the payment and making it nontaxable to the payee-spouse. For example, a husband who was ordered by an Oklahoma court to pay his wife $154,000 for her attorneys’ fees prior to the entry of a final divorce decree was unable to deduct his payment. The Tax Court and the Tenth Circuit Court of Appeals agreed with the IRS that under Oklahoma law, the husband’s liability to pay the attorneys’ fees would not have ended, as a hypothetical matter, had the wife died before the final decree was entered. The policy reason for the state law is to assure that attorneys get paid for their services, which will enable indigent clients to retain counsel in divorce actions.

In this situation, the payer can obtain a deduction if the attorneys’ fees remain the liability of the payee-spouse and the court decree increases the amount of cash alimony to cover the fees, rather than having them paid separately. The cash alimony would be taxable to the payee-spouse. The payee-spouse’s payment of the fees to the attorneys may be deductible, but only as a miscellaneous expense subject to the 2% of AGI floor.

37.5 Child Support Payments Are Not Alimony

A payment that is specifically designated as child support in the divorce or separation instrument (37.2) is not deductible by the payer or taxable as alimony to the payee.

Even if there is not a specific allocation to child support, a payment will be presumed by the IRS to be payable for child support if it is to be reduced on the happening of a contingency relating to the child, such as: the child reaches a specific age or income level, or the child leaves school, marries, leaves the parent’s household, or begins to work.

If a divorce or separation instrument requires both alimony and child support payments, and child support payments for a prior year were missed, or current-year child support payments are less than the required amount, an expected alimony deduction for current-year payments can be lost because the payments are applied first to the child support obligations, including any arrearage. For example, a taxpayer paid $17,963 to his ex-spouse in 2004. His total child support obligation in 2004 for his two children was $23,147, of which $12,000 was for 2004 child support, $5,125 for past-due child support, and $6,022 to reimburse his ex-spouse for her payment of health insurance premiums and medical expenses for the children that he was obligated to pay. Since his total payments in 2004 of $17,963 were less than the total child support owed for 2004, the Tax Court held that all of the payments were allocable to the child support and not deductible as alimony.

Tax refund diversion for delinquent child support. The IRS can give your tax refund to a state that is paying support to your child if you fail to make support payments. The IRS will not notify you of the diversion until it is made to the state. However, the state agency must provide prior notice of the proposed offset and procedures for contesting it.

37.6 No Minimum Payment Period for Alimony

There is no minimum payment period, but a recapture rule applies where payments fall by more than $15,000 within the first three years (37.7).

37.7 3rd Year Recapture If Alimony Drops by More Than $15,000

The recapture rules are designed to prevent the so-called “front loading” of property settlement payments disguised as alimony. However, the rules apply even where no property settlement was intended if you come within their terms. For example, the recapture rules may be triggered where several scheduled payments in the first year are missed and paid in the second year.

In general, deductible payments you make in the first year or second year are recaptured (that is, reported as income) in the third year where payments within the first three years decline by more than $15,000. The three years are called “post-separation years.” The first post-separation year is the first calendar year in which you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a separation agreement. The period does not begin with the year of the decree or agreement if no payments are made. Recapture does not apply to temporary support payments made before the final decree or agreement. The second and third post-separation years are the next two calendar years after the first post-separation year whether or not payments are made during those years.

The steps of recapture are:

The Examples below illustrate how to make these computations.

When recapture does not apply. Recapture is not triggered if payments in both the first and second post-separation years do not exceed $15,000. Recapture also does not apply to:

• Payments made under a continuing liability to pay for at least three years a fixed part of your income from a business or property or from a job or self-employed business or profession, or
• Payments that end because of your death or the death of your former spouse or the remarriage of your former spouse at any time before the end of the third post-separation year.

37.8 Legal Fees of Marital Settlements

If you are receiving taxed alimony, you may deduct part of your legal fees. Ask your attorney to divide his or her fees into charges for arranging: (1) the divorce or separation and (2) details of the alimony payments.

You may be able to deduct the legal fees allocated to (2), but you may not deduct the fee attributed to the divorce or separation negotiation. The deduction for legal fees of arranging your alimony is subject to the 2% of adjusted gross income (AGI) floor on miscellaneous itemized deductions (19.1) which may limit (or possibly eliminate) your deduction, and if you are subject to alternative minimum tax, the deduction is not allowed at all for AMT purposes (23.2). If the alimony is not taxed to you, you may not deduct any part of the fee. However, part of a fee allocated to a property settlement may be added to the basis of the property.

If you are paying deductible alimony, you may not deduct legal fees paid for arranging a divorce or for resisting your spouse’s demands for alimony. Furthermore, you may not deduct legal fees incurred in resisting your spouse’s claims to income-producing property the loss of which would affect your earnings. That part of your legal fee that is identified as being paid for tax advice is allowed as a miscellaneous itemized deduction subject to the 2% of AGI floor (19.1), but no deduction is allowed for AMT purposes.

Whether you are paying or receiving alimony, the following types of proof may support a miscellaneous itemized deduction for the part of the fee allocated to tax advice:

• The fee is charged by a firm that limits its practice to state and federal tax matters and is engaged to advise on the consequences of a property settlement involving the transfer of property in exchange for other property and the release of the other spouse’s marital rights in the property.
• The fee is charged by a firm engaged in general practice that assigns tax problems, such as the tax consequences of creating an alimony trust, to its special tax department. On the bill, an allocation is made for tax advice based on time, complexity of the case, and the amount of tax involved.
• An attorney handles the divorce for a fixed fee and also gives advice on the right to claim exemptions for the children following the divorce. The bill allocates part of the fee to the tax advice, based on time, and fees customarily charged in the locality for similar services.