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A Sad Tale of Alimony Deduction Denied

Updated: Jan 4, 2023

Once upon a time, before the era of Trump, there was a widely used (and abused) tax deduction called “Alimony.” Basically, mandated payments to support 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 target by the IRS for audit because it was so prevalent and because so many folks didn’t report it right, on either side.

So, the IRS convinced Congress to eliminate the Alimony deduction when a new President wanted to do a major overhaul of the tax code. That overhaul is set to expire at the end of 2024, reverting back to the previous law, which allows for the deduction of Alimony and the reporting of it as income again.

For Alimony to qualify for a deduction or income, it has to meet four basic requirements. 1) Payments have to be in cash or cash equivalent. 2) Payments must be made under a formal divorce or separation instrument. 3) Payments must end at the death of Payee Spouse. 4) Payments must not be specifically defined as “non-alimony” in any divorce documents.

Here is a sad story to make a point.

Once upon a time, there was a Doctor Ibrahim who was married to Ms Cheryl Edington. Each had been previously married and had children from those prior marriages. He was a medical doctor; she was a nurse. In April 2016, they separated and executed a “Marital Separation Agreement.” This agreement specifically provided that neither spouse would pay alimony. It also went on to state that “each will be forever precluded from requesting alimony as part of their decree of dissolution.” The agreement finally did state that Dr. Ibrahim would pay Ms Edington a sum to “assist in Wife’s relocation and legal fees.” The final sum Dr. Ibrahim paid to Ms Edington was $50,000.

Dr. Ibrahim then proceeded to deduct that $50,000 as “alimony” on his 2017 tax return. The IRS audited Dr. Ibrahim and determined that he was incorrect in deducting the $50,000 as “alimony” because of the specific wording in the “Marital Separation Agreement.” The matter ended up in court and the judge ruled in favor of the IRS. He also upheld a substantial understatement of income penalty. Ouch! All that money going out of Dr. Ibrahim’s bank account… Tax, Penalty, Attorney Fees, Court Fees, etc. He should have read that “Marital Separation Agreement” and saved himself all that trouble. To the IRS and courts, the written word is paramount, especially when signed by the party.

So, as we rapidly come up on 2024, with Alimony coming back online, make sure you follow the four rules in order to get a deduction.

Have you heard? Prov 21: 19 says, “Better to live in the wilderness than with a contentious and angry woman.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.

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