Not many things change the face of a financial management plan like a divorce does. There are ways to ease the financial changes, and understanding the Internal Revenue Code requirements for handling or reporting alimony can be helpful, when spousal maintenance is a factor in a divorce settlement.
Generally, property settlements or child support payments are always non-deductible to the payer and non-taxable to the recipient. Alimony is considered differently by the government. Alimony is governed by the Internal Revenue Code, not by court orders or divorce decrees. Therefore, it is typically a tax deduction for the payer and taxable income for the recipient.
If you pay alimony, you can show it on your tax return as a tax deduction, and if you receive alimony, you must report the full amount. Both parties must exchange Social Security numbers or face a penalty, so the likelihood of not reporting the full amount paid or received is less, and if it does occur, can be easily spotted by IRS auditors.
If you want to consider alimony payments for tax reasons, timing is crucial. Legal separation papers or a final divorce decree must be filed prior to any payment of alimony. Any payments made prior to proper documents being filed cannot be included on tax returns.
Many couples considering alimony payments choose a one-time payment. This form of alimony carries specific tax implications and requires careful financial management. Upfront payments of alimony are usually considered part of the overall assets. This type of settlement structure is not taxable for the recipient or tax deductible for the payer
Source: Forbes, “Seven key things women need to know about the tax implications of alimony payments” Nov. 30, 2011