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For tax purposes, alimony agreements should be crystal clear

Taxes can certainly leave the filer stressed out over deductions and potential audits. Trying to do taxes after a divorce can be tricky as well. As a recent news story documents, it is important to have divorce and alimony agreements made crystal clear in writing so that they can be used to determine what, if any, deductions are allowed for alimony. For individuals divorcing in Texas, one man's story can provide some valuable food for thought. 

The man, a successful lawyer, was divorcing his wife. Prior to the divorce, he received a hefty bonus, which, after taxes, came to about $155,000. Before the divorce was finalized, he agreed to share the bonus down the middle with his then-wife.

When he filed taxes later that year, after the divorce, he claimed the split portion of the bonus as an alimony payment, along with other payment he made, including a temporary monthly allotment. The IRS challenged the bonus payment, stating that it was not part of a formal alimony agreement. As it turns out, the bonus was not clearly written into the settlement agreement, since the division occurred before the divorce was finalized. 

In this case, the man was not allowed to claim the portion of the bonus paid to the spouse as an alimony deduction, forcing him to pay taxes on that money. Had he made the bonus a part of the formal alimony agreement, he would have been able to claim the deduction. Individuals considering divorce in Texas can learn from this man's mistake. Another great help for sorting out divorce planning matters is a family law attorney who is trained in the divorce laws and procedures of one's home state. 

Source: accountingweb.com, "Zero Alimony Deduction for a Split Bonus, Tax Court Says", Ken Berry, June 19, 2017

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