In a divorce, there are typically three types of payments that are made between spouses. One is in the form of alimony, another is in the form of property settlements, and the third, if there are minor children, is in the form of child support.
Deductible Payments:
For amounts paid by one spouse to another spouse to be considered deductible, the amounts paid must be under either a legal separation agreement (called "separate maintenance payments") or a divorce decree (called "alimony"). For separate maintenance payments to be considered deductible, the separation must be considered a legal separation. In a legal separation, there needs to be a formal separation agreement, and neither spouse may live together in the same home. Additionally, a legal separation requires a court order governing what will happen while the parties are separated.
A legal separation is infinitely more complicated and more expensive than an informal separation. Like a legal separation, a divorce decree must be issued under a court order. There is a formal agreement setting forth the terms of the divorce. The payments must be made in cash, and there is a three-year recapture rule that looks at the dollar amount of the payments made over a term of three years. As an example of this rule, if the payments made in years two and three are lower than the payment made in year one by $15,000 or more than the year one payment is considered a property settlement and that deduction are recaptured (treated as taxable income to the payor spouse) in year three. Liability for separate maintenance payments or alimony must end upon the death of the recipient spouse.
Any cash payments made to third parties (i.e. mortgage or rent), under the separation agreement or divorce decree, qualify for separate maintenance payments or alimony. Legal fees paid for tax advice relating to the separation or divorce are deductible as itemized deductions. Legal fees relating to the drafting of the separation agreement or the divorce decree and legal fees related to child custody or child support are not deductible. The payor spouse is entitled to a tax deduction for the separate maintenance payments or alimony made, incident to a legal separation or divorce, and the recipient spouse is required to include such payments as income in their annual income tax return filing. Separate maintenance payments and alimony are considered "compensation" to the recipient spouse for IRA deduction purposes.