For alimony to be deductible to the payor/spouse and taxable to the payee/spouse, the alimony must meet all of the elements of IRC section 71. Just to meet the criteria for alimony under a state statute is not enough if any of the Internal Revenue Code requirements are missing.
1. The alimony must be paid in cash and received by or on behalf of a spouse.
2. The alimony must be paid under a divorce or separation instrument.
3. The alimony must not be designated as not includible in gross income under section 71 and not allowed as a deduction under section 215.
4. The alimony payments are based upon a change in the status of the marriage such as where the husband and wife are separated under a judgment of dissolution or legal separation and the husband and wife or former husband and former wife are not members of the same household.
5. The alimony payments stop upon the death of either the payee/spouse.
6. The alimony payments are not fixed as child support.
7. The alimony payments cannot be front loaded in excess of the permissible amounts, otherwise the alimony will be subject to recapture per section IRC 71.
This is a question asked quite frequently of attorneys and tax preparers. It is an important question to ask because failure to understand the tax implications can result in serious penalties. When people are going through a divorce the income tax is not usually considered when alimony is being addressed, but it does play a huge role later. Both payer and recipient will need to address this on their payments and deductions when filing out taxes. In the State of Florida alimony payments, unlike child support, are considered and treated as taxable income to the receiver, and the payer of the alimony will see this as a deduction.
The best way to explain would be to use an example. Say the judge awards PERSON A with $1000 a month in alimony and they receive another $1000 monthly at their job. The total income for that month for PERSON A is $2000 dollars or about $400 due in federal taxes (20% tax bracket). This tax burden ($400 a month) should be considered ahead of time when negotiating what is needed for alimony because you will end up paying that at the end of the year (or quarterly depending on circumstances).
Conversely, person B paying the alimony will reduce their income that month by $1000 and will see a reduction of what they owe in monthly/yearly income tax by the percentage calculated for their tax bracket. It is possible if the alimony payments are high enough that he or she may even move into a lower tax bracket based on the terms of the decree.
Because alimony can have a profound effect on taxes, it is important to consider that when negotiating your terms. It can put the receiver into a higher tax bracket and the payer into a lower one. It is best to consult an attorney or even CPA when trying to determine how much money you should receive monthly in alimony or settlement payments.