TAX CONSEQUENCE OF SPOUSAL SUPPORT

FYI-Flint Divorce Bankruptcy Attorney Terry R. Bankert 235-1970, www.attorneybankert.com  asks DID YOU KNOW?.From Creative Tax and Financial Planning to Settle the Challenging Divorce Case Joseph W. Cunningham Joseph W. Cunningham JD CPA PC Troy

I. Use of 71 Payments to Advantage

A. What are Section 71 payments?

1. They are essentially another name for alimony, or spousal support, payments
that qualify as taxable to the payee under IRC Section 71 and deductible by
the payer under IRC Section 215.

2. Because Section 71 payments can be used to considerable advantage in
structuring divorce settlements it is important for family law practitioners to
have a working knowledge of the rules to avoid missteps and to effectively
use Section 71 payments to save taxes and facilitate settlements.

B. What are the requirements to qualify under IRC 71?

1. Cash—Payments are in cash. Services, property, or the use of property do
not qualify.

2. Receipt—Payments are received by the payee spouse or constructively
received by a third party for the spouse’s benefit pursuant to a divorce or
separation instrument.

3. Pursuant to Qualifying Divorce Document—Payments are made pursuant
to a “divorce or separation instrument”—a judgment of divorce or separate
maintenance; a settlement agreement, incident to such a judgment; a written
separation agreement; or, a temporary support order.

4. Termination on Payee’s Death—The payer’s obligation to make the payments
terminates if the payee dies, and the payer has no obligation to make
any payment as a substitute after the payee’s death.

5. No Disqualifying Designation—The payments are expressly designated as
nontaxable/nondeductible.

6. Living Apart—The parties do not reside in the same household when the
payment is made. An exception applies if one party is preparing to leave the
home and does depart within one month of the payment date. The “not living
under the same roof” provision does not apply to temporary support payments
made pursuant to a court order or written separation agreement during
the pendency of a divorce.

7. No Joint return—If the divorce is still pending, the parties do not file a
joint return.

8. Not Child Support—The payments are not for child support.

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