Avoiding Alimony Tax Pitfalls

The purpose of making payments to a spouse or former spouse as alimony under the Internal Revenue Code (the Code) is so that such payments will be taxable to the payee and deductible to the payor. For any stream of payments to be alimony as defined by the Code, payments must meet the following rules:

• The payment must be made by cash, check, money order or the like, on behalf of the payee spouse or former spouse.
• It must be made pursuant to a divorce or separation instrument.
• The instrument cannot designate the payments as not taxable to the payee and not deductible to the payor.
• In the case of individuals divorced or legally separated, the parties cannot be members of the same household.
• The liability to make such payments must cease on the death of the payee.
• The payment may not be fixed as payable for support of the payor's children.
• The parties, if married, cannot file a joint return.

In addition to the seven rules to make a stream of payments alimony, the payments cannot be front-loaded and decrease by more than a permissible amount during the first three post separation years. This arrangement can cause recapture of the excess payments to the payor in the third post-separation year.