When a divorce court orders one spouse to pay alimony to the other spouse it is taxable income to the person receiving the deductions. The person paying it however gets to take a tax deduction on the payment. Alimony is also a deduction from adjusted gross income, which means the husband or wife paying it receives the tax benefit, even if he or she does not itemize their tax deduction.
While this might seem a situation in which whatever one spouse gains the other spouse loses this frequently is not the case. As a bankruptcy attorney I can tell you that in most cases in which the court orders alimony it is because the party receiving the payment needs financial help and the party being ordered to pay it is significantly better off. Thus while the payer will get his deduction the receiver is likely to be in a lower tax bracket and will end up paying less tax than the former spouse saves.
To receive the alimony tax treatment the payment must meet the test set out in the Internal Revenue Code. The payment has to be made in cash or a cash equivalent, it must be the result of a divorce or a separation agreement, and the payments must not continue after the death of the payee. Also it cannot be child support, and there can be some recapture of the tax benefit, if the payment drops too much in the first three years.
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