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Meeting the deductibility requirements for alimony payments

The outcome of a U.S. Tax Court case may impact the way Texas residents approach alimony payments. In order to qualify for an alimony deduction, said the court, money transferred to the ex-spouse must have been due under a legally-enforceable separation or divorce agreement. It is not enough simply to turn over the money.

In the case, an attorney who earned an end-of-year bonus paid almost half of the after-tax amount to his wife. The payment was made during the course of the divorce, before it was finalized. Following the divorce, the attorney filed a tax return claiming an alimony deduction for the portion of the bonus paid to his ex-wife. The Internal Revenue Service challenged the deduction.

The court found that the payment did not qualify as alimony and denied the deduction. In order to qualify as alimony for purposes of deduction, the payment must be made pursuant to the terms of a separation or divorce agreement that is in writing. Additionally, the parties must not be living together at the time of the payment and the obligation to pay must terminate on the death of the payee.

In a d case where one of the parties intends to make payments to the other prior to the finalization of the divorce, it is generally good practice to incorporate the payment into the terms of the divorce agreement. An attorney with experience in divorce law can help draft a comprehensive settlement agreement that preserves tax deductions for alimony payments and that addresses other applicable issues such as property division.

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