If you are going through a divorce and alimony is an issue, you should be aware of certain basic tax considerations associated with an award of alimony. Generally, the treatment of alimony is to make the alimony taxable to the recipient and deductible by the payor. Alimony is to be included as part of the recipient’s gross income in accordance with the definition of gross income in the Internal Revenue Code. However, pursuant to Section 71(b) of the Internal Revenue Code, in order for alimony to be taxable and deductible, the alimony payments must:
1. Be received pursuant to a divorce instrument, such as a marital settlement agreement or divorce decree.
2. Not be specifically excluded as gross income under the divorce instrument.
3. Not be made by a payor spouse that is a member of the same household as the payee spouse; and
4. Terminate on the death of the recipient.
In addition, for payments to be allowed as alimony, the payments must be in cash or cash equivalent. Thus, a non-cash obligation, such as allowing a recipient spouse to reside rent- in the payor spouse’s house will not be allowed as alimony for tax purposes.
Keep in mind, in the event a divorce case goes to trial, the trial court has discretion to order that alimony payments are to be excluded from the gross income of the payee spouse and not deducted by the payor.