Setting Up Tax-Deductible Alimony Payments

WHEN A MARRIAGE disintegrates, payments to the ex might have to be made. However, those who face this unhappy fate may get some relief: You can deduct payments that meet the tax-law definition of alimony. On the flip side, alimony payments that you deduct must be reported as taxable income on your ex's Form 1040 — overall a fair enough exchange.

The difficult part is meeting the tax-law requirements for deductible alimony. If you fail to set your payments up properly before signing off on the divorce papers, it may be too late to salvage any deductions. Here's what you need to know to get the best results:

1. The payment must be made as a result of a written divorce or separation agreement.

2. The payment must be made to or on behalf of your ex. Payments to third parties, such as attorneys and mortgage lenders, are OK if they're made on behalf of your ex pursuant to the divorce or separation agreement or at the written request of your ex.

3. The divorce or separation agreement cannot state that the payment is not alimony.

4. After you are divorced or legally separated (meaning after you're considered divorced for tax purposes), you and your ex cannot live in the same household or file a joint Form 1040.

5. The payment must be in cash or cash equivalent.

6. The payment cannot be considered child support (more on that later).

7. Your obligation to make payments (other than delinquent amounts) must cease if your ex dies.

Regardless of what the divorce decree might say or what you and your ex might intend, only payments that meet all of these requirements count as deductible alimony. Otherwise, payments will be treated as either part of the divorce property settlement or as child support, both of which are nondeductible for you and tax-free for your ex.

Fixed Child Support
Fixed child support simply refers to payments that are designated as child support in the divorce or separation agreement.

Deemed Child Support
Deemed child support payments are much harder to spot. Starting on Day One, payments are considered deemed child support to the extent of future payment reductions that are triggered by any of the following child-related events:

The child attains age 18, 21, or the age of majority under local law.

Death of the child.

Marriage of the child.

Completion of the child's schooling.

The child leaves the household.

The child attains a specified income level or becomes employed.