Alimony
Payments of alimony made under a decree of divorce or separation are deductible by the payor spouse and taxable to the payee spouse. In order to qualify as alimony, the payment must be in cash and cannot be a transfer of property or assets. There must also be a requirement that these payments will cease upon the death of the payee. This need not be stipulated in the agreement if state law requires that payments cease after the death of the payee spouse. If the individuals are either divorced or separated, they must not be living together when the cash payments are made.
Single payments of cash may qualify as alimony if the amount is $15,000 or less. Payments exceeding $15,000 per year are subject to a recapture rule if they do not continue for 3 years or more unless ended because of the death of either spouse or the remarriage of the payee.
Any cash payments made to a third party, if required by the agreement on behalf of the payee spouse, will still qualify as alimony payments. Thus, payments made for rent, mortgage, tuition, or living expenses of the payee spouse under the terms of the divorce or separation instrument can qualify as alimony payments.
The agreement may also call for property settlement payments to be made from pension or retirement funds under a Qualified Domestic Relations Order (QDRO). Transfers made under a QDRO are exempt from the 10% penalty on premature distributions from qualified retirement plans.