In two recent court cases, alimony payments (aka spousal support) payments were disallowed as a tax deduction. There’s a bigger lesson for all of us here and I’m not talking about ‘don’t get divorced’, although, from a CPA’s standpoint that can be one of the most expensive things you ever do. No, what I’m talking about is making stupid mistakes that can cost you deductions.
There are more IRS agents roaming around than ever before. It doesn’t matter if the government shuts down, the wheels of the IRS are still turning. In fact, most government agency’s websites went black. Not the IRS. They were still very much in business.
And at the same time, it’s pretty easy to get just about anything you want from the tax code as long as you plan ahead and follow through on what you need to do. I’m talking, legal deductions, nothing remotely in the black.
But then you see cases like this and you just have to shake your head. What were the accountants and lawyers thinking?
The first case regards a divorced couple named Nye. The ex-wife went back to court to get an increased alimony payment, which she got. The ex-husband made her an offer to just give her one lump sum payment and be done with it. She agreed. He paid her. He took the deduction and the IRS disallowed it.
It wasn’t because it was a lump sum payment. That is allowed as long as it’s been more than 3 years since the divorce. The issue is that the Code says the payment must terminate upon death of the spouse. It’s possible the ex-wife might have died between the time they reached the agreement and the ex-husband paid her. Unlikely, but possible. And because of that possibility the entire deduction was disallowed.
Read the fine print! Follow the rules!
In the case of Faylor, the soon-to-be-ex husband gave his wife a payment of $20,000 to tide her over until the divorce was finalized. He took a deduction for that payment as spousal support and it was denied. That’s because the final court order didn’t reference that pre-payment.
Make sure you follow through!
Bottomline, you can have the best ideas in the world for making money and for saving on taxes, but if you don’t do something about them, you very well could lose out big time.