Ending a relationship can be hard… The emotional trauma, finding another place to live, figuring out how to deal with children… And then the legal ramifications! From the entry of the divorce, to settlement agreements, child support and alimony, divorces can be extensive and exhaustive. But the legal ramifications of a divorce do not end when a separation instrument is signed. To the contrary, they can be continuing. If settlement agreements have built in continuous or regular payments from one spouse to the other, as many do, there may be some tax reporting involved.
Generally, under the Internal Revenue Code § 1041, property settlements incident to a divorce are non-taxable. However, alimony is taxable to the recipient and deductible by the giver. Alimony is defined in the Internal Revenue Code § 71(b)(1) as cash payments that are received under a divorce or separation instrument, which does not explicitly designate those payments as not includible in gross income and not allowable as a deduction. Furthermore, the payments must be made at a time when the payee and payor are not members of the same household, and there must be no liability to make any payments of any sort after the death of the payee.
Alimony recipients beware. Make sure your separation documents are structured properly; otherwise your alimony payments may be taxable, decreasing the amount that you get to keep in your pocket.