There are basically five statutory requirements for a taxpayer to claim money transferred to them as alimony payments. If divorce or separate instrument characterizes a payment as “alimony” but fails to satisfy the five requirements under Code Section 71, the payment will not be treated as alimony for federal income tax purposes, regardless of what it is considered under state law. These fix requirements include:
1. Payment must be made in cash
2. Paid to or on behalf of spouse pursuant to an instrument
3. No contrary express
4. Cannot live within same household
5. No payments after death
Below we will go into detail in regard to these five requirements.
Cash Payments Only
First, the payment must be in cash or cash equivalent. A check or money order payable on demand would be considered a cash equivalent. However, the transfer of services or property is not a cash equivalent. The execution or issuance of a debt instrument is not considered a cash equivalent either.
Paid to or on Behalf of Spouse
Second, the payment must be made to, or on behalf of a spouse, pursuant to a divorce or separation agreement. The term divorce or separation agreement means:
1. A decree of divorce, a decree of separate maintenance or written instrument incident to a decree or divorce or separate maintenance
2. A written separate agreement
3. A decree of spousal maintenance
A decree is basically any court judgment. For example, suppose a husband agrees in writing to pay $200 a month to his wife if a final divorce decree is granted that is silent as to alimony. The payment qualifies as alimony because the written instrument for payment is incident to a divorce decree. On the other hand, if the alimony provision were contained in a prenuptial agreement, the payment will not qualify as alimony because the agreement was not incident to the decree for divorce or separation.
No Contrary Expression
The third requirement of alimony is that the divorce or separation instrument cannot specify that the payments are not to be alimony. If the instrument specifies that the payments are not alimony, the recipient must attach a copy of the instrument to his or her tax return for each year in which the designation applies.
Payments made while the coupe lives together in the same household will not qualify as alimony. This basically means that any payment made to a spouse when a joint return is filed will be disallowed as being called alimony. Even if there is some physical separation within the household, any payments made will not be considered alimony.
No Payments after Death
The divorce or separation instrument provide for the termination of alimony payments after death of the recipient spouse. The instrument must specify that the payments will cease after death or they will not be considered alimony even during the life of the recipient taxpayer.