Divorce settlements and tax consequences: alimony vs. property settlement

IN A PROPERTY DISTRIBUTION AFTER A DIVORCE: ARE CASH DIVORCE SETTLEMENTS SUBJECT TO TAX? Good question. I think the answer to that is that it depends on how it is classified: alimony or property settlement. If it is alimony it is taxable to the recipient and tax deductible by the payor. If it is a property settlement it is not taxable or deductible. How can you know if you have alimony which is taxable vs. property settlement which is not? Well, that’s the question.
First, I should direct you to the IRS’s website since I am totally not a tax person and don’t want to misadvise you on this issue. Go here to the IRS’s website to this section called Publication 504 that deals with divorced and separated individuals. and it specifically states that non-cash property settlements are NOT alimony payments. That means that cash settlements are generally going to be alimony (logical, if non-cash settlements are not, right?) and would be subject to tax. But are all cash settlements classified as alimony? I don’t think so. Again, I am not a tax expert but here is what I know about some cash settlements and taxes and alimony.
If you designate the payments as “not alimony” even if it is in cash, it will not be treated as alimony (alimony must be in cash but other requirements must be met in order to call it alimony; in other words, just because you receive a cash payment from a former spouse does not mean it is, technically speaking, “alimony.”) and thus will not be subject to tax- necessarily. One way to figure out if it is non-taxable cash property settlement is to ask yourself: is there are duration to these payments? In other words, if your spouse agrees to pay you $20,00o per month for 5 years, for example and no provisions for after death? That is probably alimony and it is taxable. Versus, you are to receive $20,000 per month for life and upon death, the payments continue to a trust or to your estate? That is not alimony and is not subject to tax, or excludability by your spouse. The latter example is of a “property settlement” and property settlements are non-taxable (but your spouse could discharge property settlements in bankruptcy and really screw you versus they can’t discharge alimony – just to really confuse you thoroughly!) In any event, see IRS Publication 504. It could have been revamped (this was for 2008) but most of the rules will likely be unchanged. Oh, and always speak with a tax specialist when getting a divorce. The rules are ever changing, and draconian so plan to use your left-brain. Image credit: