Texas laws concerning post-marital financial support for ex-spouses are different than in a lot of other states. Family courts may order temporary spousal support during the divorce process and spousal maintenance after divorce. In Texas, this arrangement is not permanent nor is it called alimony.
These rules sometimes don’t work well for all parties, particularly when spouses have substantial marital assets. So, spouses also have the option of drawing up independent contractual alimony agreements. The contract must have the court’s approval, but it can be customized by spouses.
Contractual alimony agreements are attractive for tax and property division purposes. To understand why, let’s look at alimony from the view of the Internal Revenue Service.
Alimony is an IRS tax deduction for the person who pays it. Alimony is taxable income for the recipient. That’s a complete about-face from tax rules applicable to child support, which is not deductible for the payer or considered income for the recipient parent.
Keep in mind the design of a contractual alimony agreement does not have to abide by state spousal support laws. The contract can be set up in a way that benefits one, preferably both, spouses. You, not the court, make the choices about payment amounts and alimony duration.
Alimony, as defined by the IRS, must meet several conditions. Among other tax rules, payments must be made in cash or a cash equivalent, like a check. Your separation or divorce agreement may not state the payment is something other than alimony.
Noncash property settlements in any form are not treated as alimony. Any payments made voluntarily, above terms set in a separation or divorce settlement, are not called alimony.
Tax and property implications are highly important factors when divorcing spouses are considering contractual alimony agreements. Attorneys are familiar with the complicated rules that apply. Financial advisers and lawyers can project the benefits and consequences of these agreements.
Source: Internal Revenue Service, “Topic 452 – Alimony Paid” Oct. 15, 2014