Alimony or separate maintenance is a payment ordered by court decree (not an agreement unsanctioned by the court between parties)(Faylor v Comm’r T.C. Memo. 2013-143) made from one party in a divorce proceeding to the other, in order for the receiving party to maintain a standard of living. (§ Cod. Sec. 215)
We see both sides of this situation all the time, so we must be able to determine if the payments are deductible to the payer and if so they are taxable to the payee. There are several conditions that must be met in order for the tax treatment of the payments to be determined:
1. The spouses must not file a joint return
2. The payments must be in cash, check, or money order. (Direct deposit and garnishments from wages paid directly to the payees bank are considered cash)
3. The payment must be received by or on behalf of the spouse under a divorce or separation instrument.
4. The instrument does not designate the payment as a non-alimony payment.
5. The payer and payee may not be members of the same household when payments occur.
6. There is no liability to continue making payments after the death of the payee.
7. Payment is not specifically designated as child support.
There have been some recent court cases that have confirmed the long held judgment in Richardson v Comm’r, T.C. Memo 1995-554 in regards to #4 above. Recently, in Delong v Comm’r T.C. Memo 2013-70, the court held that the taxpayer could deduct the entire amount of his unallocated support payments because the support obligation terminated upon the death of the payee and the child support part of the payments were not fixed in the decree.
One exception to the “cash” only portion of the alimony tests is life insurance. If the payment of the life insurance premium is court ordered, the policy is absolutely owned by the ex-spouse, and the ex-spouse is the irrevocable beneficiary of the policy then the payments are considered alimony and treated as such by the payer and the payee.
Still to come, Property Division