WHAT IT TAKES TO MAKE PAYMENTS TO SPOUSES

AND FORMER SPOUSES DEDUCTIBLE

To get a tax deduction for paying support to a current or former spouse, just calling the payment "Alimony" doesn’t cut it. Section 71 of the internal Revenue Code sets forth a number of specific rules must be followed:

1. PAYMENTS IN CASH: The payment must be made in cash. Services and property transfers do not count.

2. PAYMENTS BASED ON A DIVORCE INSTRUMENT: The payments must be made based on the terms of a decree of divorce or separate maintenance or a written support agreement that is incident to such decree.

3. PAYMENTS TO OR FOR SPOUSE OR FORMER SPOUSE: The payment must be made either to or for the benefit of a spouse or former spouse. This means that payments made to third parties – such as payment of medical or dental bills, health insurance, rent, etc. -- may qualify as deductible payments. It is important to remember that payments can not be voluntary. If the paying spouse makes mortgage payments for the receiving spouse, this payment will be deductible only to the extent of the receiving spouse’s ownership interest in the property. In other words, if the receiving spouse owns title to the home, the entire payment made by the paying spouse will be deductible; if the receiving spouse owns title interest to half the house, one-half of the payment will be deductible. However, if the receiving spouse does not own any interest in the home, but only has the right to live there, the payment will not be deductible.

4. DIVORCE INSTRUMENT SHOULD DESIGNATE DEDUCTIBILITY OF PAYMENTS: If the document requiring that the payments be made does not characterize the payments as "deductible" or "non-deductible," it will be assumed that intent of the parties was for the payments to be deductible to the payor and taxable to the receiver. That’s why it’s a good idea to state the intended tax result of payments whenever there are payments to a spouse or former spouse.

5. PAYING AND RECEIVING SPOUSES CAN NOT LIVE IN THE SAME RESIDENCE: When the payment is made, the spouses (or former spouses) can’t live in the same household.

6. PAYMENTS MUST STOP ON DEATH OF RECEIVING SPOUSE: There can be no liability for paying spouse to make any payments after the death of the receiving spouse. And there can be no responsibility of the paying spouse to make any payment in cash or property as a substitute for the payments after the death of the receiving spouse. The termination provisions should be placed in the document.

7. PAYMENTS CAN’T BE DISGUISED CHILD SUPPORT OR PROPERTY SETTLEMENT: No part of the payment can be identified as child support or property settlement. This rule was enacted because people going through divorce used to wrap child support and property settlement (non-deductible payments) into spousal support in order to get a deduction.

Even though the document doesn’t identify a part of the payment as child support, if payments are reduced at a child-related event – such as graduation from high school, etc. -- the IRS will treat that part of the payment as child support – meaning that it will not be deductible to the payor.

Be sure to see the file on Alimony Recapture.

© 1997, Flying Solo. This information is general in nature and is not intended to be construed as legal advice. Because all situations are different, do not make any decisions until you have consulted with the legal professional of your choice.