When is Alimony Non-Taxable?

IRC Section 71(b)(1) defines the term alimony.  The code has four requirements, three of which are commonly recognized by tax professionals: the payments must be in cash (71(b)(1)), taxpayer cannot live together (71(b)(1)(C)) and there is no liability for the payments after the death of the payee spouse (71(b)(1)(D)).

However, there is a fourth provision (71(b)(1)(B)) that is rarely encountered.  It specifies the payments are taxable (and deductible) alimony provided the divorce or separation agreement does not designate them as non-taxable (and non-deductible).

Thus the payments can be designated for tax purposes as nontaxable and non-deductible in the divorce agreement. If they are so designated, the recipient cannot treat them as earned income for IRA contribution purposes, since Sec. 219(f)(1) specifies that the alimony must be taxable to be considered compensation for making an IRA contribution.  

This provides an interesting tool when negotiating the amount of the payments by the parties to the divorce.   

March 29, 2017 by Lee Reams Sr.
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