Taxation of Alimony – Part 3

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 # 3 – PAYMENTS MUST BE MADE PURSUANT TO A DIVORCE OR SEPARATION INSTRUMENT

I.R.C. § 71(b)(1) provides that the “term alimony or separate maintenance payment” means any payment in cash if such payment is received by (or on behalf of) a spouse under a divorce or separation instrument.

I.R.C. § 71(b)(2) provides that the term “divorce or separation instrument” means —

(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree,

(B) a written separation agreement, or

(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.

“While the instrument does not have to be part of the divorce decree itself, some written agreement must exist that creates a legally enforceable right to the support payments.” Anderson v. Commissioner, T.C. Memo 1999-53 (1999) (citing Prince v. Commissioner, 66 T.C. 1058, 1066-1067, 1976 WL 3686 (1976).