Extract
Tax issues in divorce.
EXECUTIVE SUMMARY
* Because there is no clear pattern in the court decisions, taxpayers must arm themselves with expert tax advice. * Knowledge of state law is critical to proper drafting or review of a divorce agreement. * Alimony is includible by the recipient and deductible by the payer; child support is the exact opposite. As if divorce were not traumatic enough, a host of tax issues accompanies the dissolution of marriage. This article examines alimony, child support and property settlement issues, and explains the critical rules tax advisers need to know when drafting or reviewing divorce documents. Divorce is an intensely personal issue affecting more and more Americans; thus, it is important for tax advisers to understand both the legal and tax ramifications of specific types of transfers. In a divorce, a transfer between spouses can be a property settlement, alimony or child support, each with its own tax rules. This article examines the tax effects of transfers intended to be alimony or property settlements under a divorce agreement, settlement or decree. The rulings illustrate that substance overrules form. Because there is no clear pattern in the court decisions, taxpayers must arm themselves with expert tax advice. The article also addresses pitfalls and identifies planning opportunities. Alimony Sec. 71(a) provides that gross income includes amounts received as alimony or separate maintenance payments. Sec. 215(a) allows an "above the line" deduction for alimony paid. Sec. 71(b) defines alimony as any payment in cash, if all of the following are met: 1. Payment is received by (or on behalf of) a spouse under a divorce or separation instrument (Sec. 71(b)(1)(A)). 2. The divor...See the full content of this document
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