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Alimony deductions after divorce

Money is often tighter after a divorce, so Massachusetts residents might need to know about how alimony and child support are taxed. Child support payments do not come with any tax benefits, but alimony is deductible for the payer. However, certain criteria must be met to qualify for a deduction.

When making payments to a former spouse, these transactions must be part of a court-ordered agreement. The parties cannot live in the same household, and the payment obligation must stop if the other party dies. Alimony is deductible when payments meet these requirements.

One case brought before the U.S. Tax Court involved a work bonus. An attorney received a $250,000 bonus while married. Before the couple divorced, they formed an agreement about the bonus. The man reported the bonus on his tax returns and paid the woman her half of the money after tax withholdings. Once the divorce was finalized, the couple established spousal support guidelines.

The problem arose when the man claimed a $127,000 alimony deduction. This amount included the bonus payment, but the bonus was not mentioned in the spousal support order. The IRS challenged the deduction, and the court agreed with the IRS as no evidence showed that the bonus was part of the divorce proceeding. This means the payment was not considered alimony.

This case is an example of how complicated the divorce process can be. A couple might work out some agreements between them before a divorce is finalized in order to make things easier when dividing other property and assets, but these decisions might have unintended ramifications later. This is one reason why each party may wish to consult an attorney when involved in family law matters.

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