In 2006, a man received a $250,000 bonus that was worth over $155,000 after taxes. In 2007, he filed for divorce from his wife and gave her nearly half of the after-tax amount. Days later, the wife signed an agreement saying that the money was community property and that he would claim the entire bonus on his tax return. The man then claimed a $127,000 alimony payment on an amended 2007 joint return filed with a new spouse.
However, the IRS challenged the deduction, and the U.S. Tax Court agreed with the IRS. It found that the payment was mentioned in a divorce or separation instrument. It also found that the payment was never part of an order related to the divorce agreement or part of a written separation agreement. In addition to meeting those two requirements, a payment is generally not considered to be alimony if the parties to the payment are living in the same household.
A payment is also generally not considered to be alimony if the obligation to pay doesn’t end when the recipient dies. Determining whether or not a payment is considered to be alimony can have an impact on a person’s tax return. Payments made are generally considered to be a tax write-off while payments received are generally considered to be income.
People who are considering going through the divorce process may find it advisable to have legal counsel. An attorney can talk more about common issues such as property division and alimony. If a prenuptial agreement exists, it may determine if a person is entitled to support and how much that person will receive.