Kelly Bullis
Saturday 16 July 2022
Once upon a time, before the Trump era, there was a widely used (and abused) tax deduction called alimony. In principle, penalty payments for the maintenance of a former spouse were considered a deductible item and the amounts received by a former spouse were to be reported as taxable income. This was a regular IRS audit target because it was so widespread and because so many people on both sides failed to report it properly.
So the IRS persuaded Congress to abolish child support when a new president wanted to make a major overhaul of the tax code. This revision is scheduled to expire at the end of 2024 and return to the old law, which again allows the deduction of maintenance payments and their recognition as income.
For alimony to be deductible or qualify as income, it must meet four basic requirements: payments must be made in cash or cash equivalents; Payments must be made under a formal deed of divorce or separation; Payments must end upon the death of the payee’s spouse; Payments must not be specifically defined as “no alimony” in divorce documents.
Here’s a sad story to make a point.
Once upon a time there was a Dr. Ibrahim who was married to Ms. Cheryl Edington. Each had been previously married and had children from those previous marriages. He was a doctor; She was a nurse.
In April 2016, they separated and signed a “marriage separation agreement.” This agreement specifically provided that neither spouse would pay alimony. It also went on to say that “everyone will forever be barred from seeking alimony as part of their dissolution decree.” The agreement eventually stated that Ibrahim Edington would pay a sum to “assist with the woman’s relocation and legal fees”. The final sum Ibrahim paid Edington was $50,000.
Ibrahim then deducted that $50,000 as “support” on his 2017 tax return. The IRS audited Ibrahim and found that he had improperly deducted the $50,000 as “alimony” based on the specific wording in the “spousal separation agreement.”
The matter ended up in court and the judge ruled in favor of the IRS. He also acknowledged a significant understatement of the income penalty. Ouch! All that money going out of Ibrahim’s bank account…taxes, penalties, attorney’s fees, court fees, etc. He should have read that “separation agreement” and saved himself all that trouble. The written word is of paramount importance to the IRS and the courts, especially when signed by the party.
So as we fast approach 2024 and child support payments are coming back online, make sure you follow the four rules to get a deduction.
Have you heard? Proverbs 21:19 says, “Better to live in the wilderness than with a quarrelsome and angry wife.”
Kelly Bullis is a chartered accountant in Carson City. Contact him at 882-4459. On the Internet at BullisAndCo.com. Also on Facebook.
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