If properly structured in a Separation Agreement or Divorce Decree, spousal support payments or alimony payable to a former spouse under the Internal Revenue Code will be taxable to the payee and deductible by the payor. The payments must be by check, money order, or cash, pursuant to a divorce or Separation Agreement signed by the parties. The agreement or court Order cannot state that the payments are not taxable to the payee and not deductible to the payor. Additionally, the parties cannot be members of the same household and the liability to make such payments must cease on the death of the payee. The money must be paid to the spouse and cannot be paid as child support for the children. At the end of the year, the parties, if married, cannot file a joint income tax return. If these requirements are met, the payments can be deductible by the payor and will be included as taxable to the payee.
Although it seldom happens, another consideration exists concerning the Internal Revenue Code requirements which is that the payments cannot be "front-loaded" and decreased by more than a specified amount during the first three post separation years. If the payments do fall in this trap, it will result in a recapture of the excess payments to the payor in the third post separation year, resulting in devastating tax consequences. This very seldom happens, but can occur if someone drafts an agreement that attempts to be too clever in arranging payments and deductions in high income divorce cases. A violation can occur requiring the payor spouse to include the excess amount in gross income in the payor spouse's third post separation year. Such a result should be avoided whenever possible.
James H. Allison
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For more information, contact the Family Law Offices of Renee M. Marcelle at (415) 456-4444, or online at http://www.familylawmarin.com/