EXECUTIVE SUMMARY

* FOR ALIMONY TO BE TAX DEDUCTIBLE, payments must be made in cash under a divorce or written separation instrument, the spouses must reside in separate households, the payor's liability must end with the payee's death, the payor and payee must file separate returns and the divorce or separation instrument can't designate nonalimony treatment.

* IT'S CRUCIAL FOR THE DIVORCE DECREE to contain a termination-at-death clause to assure alimony treatment for income tax purposes.

* NONALIMONY TREATMENT IS PERMITTED if the divorce agreement designates the payments as not includable in income and not allowable as a deduction.

* THE COURT OF APPEALS FOR THE SIXTH CIRCUIT held that if the language of a domestic relations order is a "qualified domestic relations order," the tax burden is shifted to the alternate payee. The intent of the parties is irrelevant.

* TAX COURT DECISIONS ILLUSTRATE THAT CONFORMING completely to every detail of a dependency exemption waiver form is not as important as meeting the requirements of the Internal Revenue Code and Treasury regulations.

CPAs who prepare tax returns for divorced individuals must properly report transactions such as alimony and nonalimony payments, retirement benefits under qualified domestic relations orders (QDROs) and dependency exemptions. The CPA should examine divorce documents to decide the tax treatment rather than rely on the client's characterization of the tax effects of divorce-related agreements. This article will help CPAs evaluate the tax effects of divorce documents and give tax advice to clients in divorce-settlement negotiations. Remember that the results in the cases discussed here may not hold true in other jurisdictions.