No divorce plan is complete without
considering the tax consequences. Here are a few of the highlights to keep in
mind.
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Alimony/Maintenance. Usually deductible to the payor and taxed as income to the payee, if the IRS
requirements are met. See IRC §71. Here is the explanation of the alimony
rules from the IRS. |
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Tax
liability on assets. Not all assets are equal. A checking
account filled with after-tax dollars is much more valuable than an
appreciated asset with a low basis. The exclusion
for gains on residences can make the house particularly attractive. |
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Dependency
exemptions. Figuring
out who should get the exemptions for the kids is more complicated with the child
tax credit (exemption and credit must go together). Its
worth putting a pencil to it because it can save some dollars. Here is the
IRS dependency exemption explanation. |
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Costs of
getting a divorce. The legal fees for your divorce are not deductible unless
they are for tax advice or to obtain alimony. Some expert fees may also be
deductible. IRS explanation
on divorce fees. |
Sec.
71.
Alimony and separate maintenance payments
TITLE 26, Subtitle
A, CHAPTER 1, Subchapter B, PART II, Sec.
71.
STATUTE
(a) General rule
Gross income includes amounts received as alimony or separate maintenance
payments.
(b) Alimony or separate maintenance payments defined
For purposes of this section -
(1) In general
The term "alimony or separate maintenance
payment" means any payment in cash if -
(A) such payment is received
by (or on behalf of) a spouse under a divorce or separation instrument,
(B) the divorce or
separation instrument does not designate such payment as a payment which is not
includible in gross income under this section and not allowable as a deduction
under section 215,
(C) in the case of an individual legally separated
from his spouse under a decree of divorce or of separate maintenance, the payee
spouse and the payor spouse are not members of the
same household at the time such payment is made, and
(D) there is no liability to
make any such payment for any period after the death of the payee spouse and
there is no liability to make any payment (in cash or property) as a substitute
for such payments after the death of the payee spouse.
(2) Divorce or separation instrument
The term "divorce or separation instrument"
means -
(A) a decree of divorce or
separate maintenance or a written instrument incident to such a decree,
(B) a written separation
agreement, or
(C) a decree (not described
in subparagraph (A)) requiring a spouse to make payments for the support or
maintenance of the other spouse.
(c) Payments to support children
(1) In general
Subsection (a) shall not apply to that part of any payment which the terms of
the divorce or separation instrument fix (in terms of an amount of money or a
part of the payment) as a sum which is payable for the support of children of
the payor spouse.
(2) Treatment of certain reductions related to contingencies
involving child
For purposes of paragraph (1), if any amount specified
in the instrument will be reduced -
(A) on the happening of a
contingency specified in the instrument relating to a child (such as attaining
a specified age, marrying, dying, leaving school, or a similar contingency), or
(B) at a time which can
clearly be associated with a contingency of a kind specified in subparagraph
(A), an amount equal to the amount of such reduction will be treated as an
amount fixed as payable for the support of children of the payor
spouse.
(3) Special rule where payment is less than amount specified in
instrument
For purposes of this subsection, if any payment is
less than the amount specified in the instrument, then so much of such payment
as does not exceed the sum payable for support shall be considered a payment
for such support.
(d) Spouse
For purposes of this section, the term "spouse" includes a former
spouse.
(e) Exception for joint returns
This section and section 215 shall
not apply if the spouses make a joint return with each other.
(f) Recomputation where excess front-loading
of alimony payments
(1) In general
If there are excess alimony payments -
(A) the payor
spouse shall include the amount of such excess payments in gross income for the
payor spouse's taxable year beginning in the 3rd
post-separation year, and
(B) the payee spouse shall
be allowed a deduction in computing adjusted gross income for the amount of
such excess payments for the payee's taxable year beginning in the 3rd
post-separation year.
(2) Excess alimony payments
For purposes of this subsection, the term "excess
alimony payments" mean the sum of -
(A) the excess payments for
the 1st post-separation year, and
(B) the excess payments for
the 2nd post-separation year.
(3) Excess payments for 1st post-separation year
For purposes of this subsection, the amount of the
excess payments for the 1st post-separation year is the excess (if any) of -
(A) the amount of the
alimony or separate maintenance payments paid by the payor
spouse during the 1st post-separation year, over
(B) the sum of -
(i) the
average of -
(I) the alimony or separate maintenance payments paid
by the payor spouse during the 2nd post-separation
year, reduced by the excess payments for the 2nd post-separation year, and
(II) the alimony or separate
maintenance payments paid by the payor spouse during
the 3rd post-separation year, plus
(4) Excess payments for 2nd post-separation year
For purposes of this subsection, the amount of the
excess payments for the 2nd post-separation year is the excess (if any) of -
(A) the amount of the
alimony or separate maintenance payments paid by the payor
spouse during the 2nd post-separation year, over
(B) the sum of -
(i) the
amount of the alimony or separate maintenance payments paid by the payor spouse during the 3rd post-separation year, plus
(5) Exceptions
(A) Where payment ceases by reason of death or
remarriage
Paragraph (1) shall not apply if -
(i) either
spouse dies before the close of the 3rd post-separation year, or the payee
spouse remarries before the close of the 3rd post-separation year, and
(ii) the alimony or separate
maintenance payments cease by reason of such death or remarriage.
(B) Support payments
For purposes of this subsection, the term "alimony or separate maintenance
payment" shall not include any payment received under a decree described
in subsection (b)(2)(C).
(C) Fluctuating payments not within control of payor spouse
For purposes of this subsection, the term "alimony or separate maintenance
payment" shall not include any payment to the extent it is made pursuant
to a continuing liability (over a period of not less than 3 years) to pay a
fixed portion or portions of the income from a business or property or from
compensation for employment or self-employment.
(6) Post-separation years
For purposes of this subsection, the term "1st post-separation years"
means the 1st calendar year in which the payor spouse
paid to the payee spouse alimony or separate maintenance payments to which this
section applies. The 2nd and 3rd post-separation years shall be the 1st and 2nd
succeeding calendar years, respectively.
(g) Cross references
(1) For deduction of alimony or separate maintenance payments, see
section 215.
(2) For taxable status of income of an estate or trust in the case of
divorce, etc., see section 682.
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 121, 152, 215, 219, 220, 223, 382, 408 of this
title.
SOURCE
AMENDMENTS
EFFECTIVE
DATE OF 1986 AMENDMENT; TRANSITIONAL RULE
EFFECTIVE
DATE OF 1984 AMENDMENT
PLAN
AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989