Alimony Taxation – Part 8

Alimony, also known as Spousal Support in California, is GENERALLY deductible to the payor and taxable income to the payee. I highlighted the word generally because the mere use of the term Alimony or Spousal Support in a settlement agreement does not affect the tax consequences of payments. Internal Revenue Code Section 71 contains eight requirements that must be met for a payment to be considered taxable to the recipient and tax deductible to the payor. I will review all eight in the coming weeks.

REQUIREMENT # 8 – CHILD SUPPORT PAYMENTS CANNOT QUALIFY

I.R.C. 71(c)(1) provides that a payment is not includable in the payee’s gross income or deductible by the payor spouse, to the extent that “the terms of the divorce or separation instrument fix (in terms of an amount of money or part of the payment) as a sum which is payable for the support of children of the payor spouse.”

CHILD CONTINGENCY RULES

(2) For purposes of paragraph (1), if any amount specified in the instrument will be reduced — on the happening of a contingency specified in the instrument relating to a child (such as attaining a specified age, marrying, dying, leaving school, or a similar contingency), or at a time which can clearly be associated with a contingency of a kind an amount equal to the amount of such reduction will be treated as an amount fixed as payable for the support of children of the payor spouse.