When is alimony not deductible alimony?

When the tax law says it isn’t deductible alimony!

Just because you agree with your ex-spouse and/or the judge orders alimony does not mean it is alimony for tax purposes. Congress put in specific requirements for a payment to qualify as alimony for income tax purposes. The IRS does not care what the judge, the divorce agreement or the separation agreement calls the payment, except in one situation explained below.

Requirements to be deductible alimony

The seven requirements are:

1. The payment must be in cash. A check or bank transfer works also. There is a little wiggle room here. If the payer is required to pay third parties (e.g. housing costs, but they do not count if the payer is on the loan or deed) on behalf of the separated spouse or ex-spouse then the payment can count as paid in cash. The payments to third parties needs to be required by the written agreement. As an alternative, the spouses can agree in writing to treat a third-party payment as alimony. Get it signed.
2. The alimony must be in a written agreement or court decree. The agreement needs to be signed by both parties. A written separation agreement works, a verbal separation agreement does not.
3. The agreement cannot have a clause agreeing to treat the alimony as not alimony for tax purposes. Yes, Congress allows the spouses to agree that the alimony is not alimony with no deduction for the payer and no additional income to the recipient.
4. The payments must terminate at the death of the payee (recipient). While state law may save you if your document is silent, it is best to make sure the written agreement or court order says the payments stop at the payee’s death.
5. The spouses must not live together at the time of the payments.
6. The spouses, while separated, must not file a joint return.
7. The payments must not be reduced or stopped based on a contingency relating to a child. For example, if the payments stop when the child reaches age 18 then the payments are not alimony for tax purposes.

There is a separate rule that can make the alimony retroactively cease to be alimony. This happens when the payments are front loaded in the first year or two and then drop in year three. You can find the details in IRS Publication 504 (downloads as PDF).

One more thing, if the payer is unable to pay total due for child support and alimony, then the law treats the payment as for child support first.

Conclusion

So do not drink that Alimony Ale while reading your divorce or separation agreement. Save that for later after you are sure you are getting the tax results you desire.