The requirements for an alimony tax deduction

When Texas couples are ending their marriage, they should consider the possible tax consequences before executing a settlement agreement. A case decided in U.S. Tax Court illustrated the importance of documenting all spousal support payments within a legal agreement in order to receive a tax deduction for the expense.

The case involved a man who agreed to split with his wife a $250,000 bonus that he received in 2006 with his wife. He then filed for divorce in January of the following year, and he gave approximately half of the bonus money after tax withholding to his wife in May. They agreed in June that he would report the entire bonus amount on his tax return. Their marriage officially dissolved on Aug. 8, 2007, and the documents included a spousal support order that included various financial details but never referenced the bonus money.

In general, a spousal support payment is deductible by the payer and taxable income to the recipient. His attempt to deduct the bonus money given to his wife eventually landed him in court, which declared his deduction invalid. The law only supports a tax deduction for spousal support when a divorce or separation agreement refers specifically to the payment. Furthermore, the document cannot make declarations about the money being nontaxable or nondeductible, the people cannot be living in the same home, and obligations to make the payments must cease when a recipient dies.

A person going through a divorce, especially one that involves the division of complex assets and the payment of spousal support, might want legal advice during the process. Information provided by an attorney could help the person understand rights to retirement accounts, business assets and inheritance.

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