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Tax Practice Corner

When “Happily Ever After” ends — get it in writing.

May 2008
by Mary Recor/Journal of Accountancy

After the perfect wedding, the happy couple looks forward to sharing a lifetime of happiness. Life, however, does not always go as planned. Divorce happens. In addition to the emotional aspects of divorce, there are important tax consequences to deal with.

If the divorcing couple intends for one spouse to receive alimony, they should strongly consider the tax treatment of this approach. Alimony is deductible for the payor under IRC § 215 and includible in the gross income of the payee under section 71(a). For payments to be classified as alimony, they must satisfy all the criteria in section 71(b). They must:

  • Be made in cash (not property).
  • Be made pursuant to a divorce or separate maintenance decree or written instrument, or a written separation agreement.
  • Not be designated anything other than alimony (such as child support).
  • Be made between people living in separate households.
  • Terminate at the death of the payee.

Don’t underestimate the importance of a written instrument or agreement, as shown last year in a Tax Court case, Randall L. Sindelir v. Commissioner (TC Summary Opinion 2007-136).

This article has been excerpted from the Journal of Accountancy. Read the full article here.