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Requirements for deducting alimony payments

North Carolina estranged couples who have concerns about how a divorce may affect their tax obligations should be aware of a decision by the United States Tax Court. The ruling established that simply giving money to an ex-spouse does not meet the criteria for an alimony deduction. It must be included in a legal separation or divorce agreement.

The person who pays alimony may deduct the amount from his or her taxable income, while the recipient of the money is required to report it as income. In order for alimony to be used as a tax deduction, multiple requirements must be met. The payment must be made according to a divorce or separation agreement, and the payment cannot be specified as nondeductible or nontaxable. At the time the payment is made, the parties cannot be residing in the same household. Also, once the recipient dies, the payer’s duty to make the payment ends.

In the Tax Court case, the plaintiff earned a $250,000 bonus in 2006 while married, received over $155,000 after tax withholding and paid almost half of the bonus to his wife before the finalization of the divorce. The ex-husband claimed a $127,000 alimony deduction on an amended 2007 joint return with his new spouse for the bonus payment, seven subsequent temporary support payments and a remaining amount he determined did not qualify as alimony. The IRS challenged the portion of the alimony deduction related to the bonus division, and the Tax Court upheld the challenge on the basis that it was not included in a formal agreement.

A divorce attorney can often advise clients of the tax effects of the end of a marriage. If alimony will be an issue, the attorney can add an applicable provision to the overall settlement agreement.