Tax Brake with Robert G. Nath, Esq.

Here's a Washington answer: It depends.

“Alimony” means payments that have several features: they are in cash, they are made under a written agreement, the spouses reside in different households, the liability to make the payments ends with the recipient spouse's death, they don't file a joint return, and the divorce or separation agreement does not specify that the payment is “non-alimony.”

On the other hand, transfers of retirement pay or pensions present a different issue. Private pension plan payments are normally taxable (since the money had not been previously taxed), so the transfer of a private plan entitlement is going to be taxed immediately, unless it is done pursuant to a Qualified Domestic Relations Order. That's a court order from a state court, which allows the recipient to take the pension distribution on a tax-deferred basis. Otherwise, the normal rule of taxability would prevail.

So, when a pension plan is transferred pursuant to a divorce, and no QDRO is present, the issue becomes whether it qualifies as “alimony.” If it does, then it's taxed to the recipient and deductible by the payor. If a QDRO is in effect, the issue is murkier. The QDRO is intended to make the pension non-taxable; the alimony provision does just the opposite. Here the law is not clear at all.

How about spousal support? That term generally means money you pay to your ex that does not qualify as “alimony.” Here it's neither taxable to the recipient nor deductible by the payor.

With all this confusion, it's best to clarify the character of any payment, especially ones that involve retirement benefits.

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