Alabama residents who are considering divorce may want to be aware of a pitfall relating to tax deductions. The U.S. Tax Court recently denied a man's alimony payments that were deducted in 2008. Although his divorce decree stated that the alimony could be deducted and that his wife should report the received payments as income on her tax returns, the termination contingency on the divorce decree invalidated that stipulation.
According to the man's divorce decree, he had to pay a specific amount in alimony per month. His ex-wife was also eligible for a 40 percent portion of his bonus. It was stipulated in the decree that these payments would both terminate in the event of the ex-wife's remarriage or the demise of either one of the two parties. However, the first termination condition on the decree stated that payments would be cancelled when the youngest child reaches high school graduation.
Furthermore, the man was obligated to pay a specific amount per month as child support. Once again, the termination stipulations included the date of the high school graduation. Including this contingency in the divorce decree effectively stops all alimony payments, even spousal support, upon the graduation of the youngest child. This changed all support payments to child support.
The Tax Court acknowledged that the man relied on the professional who prepared his tax return, rather than trying to defraud the IRS, thereby sparing him penalties. Alabama couples may want to make sure they are aware of the possible pitfalls when negotiating alimony agreements. Fortunately, help is available to ensure such an agreement works for the benefit of all parties.
Source: Forbes, "Graduation Contingency Kills Alimony Deduction", Peter J Reilly, April 29, 2014