Part One: The Payment is in Cash
Alimony or separate maintenance payments are included in the gross income of the payee spouse and allowed as deduction from the gross income of the payor spouse.
A payment under a divorce or separation agreement executed or modified after 1984 qualifies as alimony if:
- Only cash payments qualify as alimony or separate maintenance payments. However, checks or money orders payable on demand meet the cash requirement.
- Payment in the form of property, no matter how readily convertible into cash, is not alimony.
- For Example: In the Lofstrom case a taxpayer could not claim an alimony deduction for a contract for deed that he transferred from his former wife because a contract for deed is a third-party debt instrument and therefore does not constitute a cash payment.
- Other Payments:
- Transfer of services
- Transfers of property (including a debt instrument of a third party or an annuity contract)
A quick note on lump-sum payments: A cash payment qualifies as alimony or separate maintenance whether the payor makes a series of payments or settles the obligation in one lump-sum payment. The manner in which payments are made is irrelevant so long as they are in cash and are made under a proper divorce or separation instrument. However, the excess front loading rules must be remembered when structuring payments.