Part Six: The divorce or separation instrument does not designate the payment as not includable in the payee-spouse’s gross income and nondeductible by the payor-spouse as alimony.
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:
- A couple may designate in their divorce or separation instrument that payments otherwise qualifying as alimony or separate maintenance payments should not be treated as alimony or separate maintenance payments under the tax laws. These payments are not deductible by the payor-spouse and not included in the income of the payee-spouse
- Agreements: This designation requires clear and explicit direction. The legal instrument must expressly state the tax treatment of the payments in order to achieve these results
- Benefit: While uncommon, different situations can arise where this designation is helpful. Also, this provision allows the payor to make an after tax lump sum payment in order to “buy-out” of spousal maintenance.
Some examples: when the payor-spouse is receiving non-taxable income (disability, tax-exempt interest, etc.) or when the payor-spouse has a net operating loss that is being carried forward each year. In some cases the parties may agree to categorize property settlement payments as non-taxable spousal maintenance in order to avoid a potential discharge due to bankruptcy of the payor.