Don’t Let Alimony Mess Up Your Taxes After Divorce

Just in time for tax season come two horror stories of people who have royally screwed up their taxes after their divorce by not paying alimony the right way.

We want to remind you that getting a divorce attorney is not the only professional you need to hire. In any tax situation, you should seek the services of a qualified CPA.

Especially after a divorce, when your financial situation has changed dramatically, you should get some professional help from an accountant. We recommend Askey, Askey & Associates with offices in La Plata and Leonardtown.

Don’t make alimony payments the wrong way

Alimony payments are deductible by the person paying them, and taxable to the person receiving them (at least for now. All this all changes in 2019.) You should remember the IRS has rules about what qualifies as alimony under the tax code.

In a recent case, one man claimed he an oral agreement with his ex-wife to pay alimony. The IRS would not allow it. Under current tax law, to be deducted from your taxes, the alimony agreement must be in writing, and be part of the divorce decree.

No written alimony agreement – no deductible alimony. This guy lost a bundle in taxes just because he failed to put his alimony agreement in writing.

Don’t let your corporation pay your spouse alimony

If one of your substantial assets is a business, you could be ordered to pay your spouse part of the business proceeds. This is normal for divorcing couples where one spouse is the owner of a corporation.

However, you have to pay your alimony personally. In a recent tax court case, a husband was court ordered to pay his wife for her share of a stake in a family owned corporation. The husband agreed to spread these charges over a period of 10 years. This was fair to both parties. It meant the wife got paid, but it avoided a dramatic financial drain on the business.

However, the husband in this case tried to be too cute. He ordered the wife paid by the corporation instead of from his own personal funds. He argued that the corporate funds were really his since he owned the corporation.

The IRS said the money was taxable dividends to the husband. There was no valid business reason for having the corporation paying his ex-wife directly, so the IRS would not allow it. This cost the business a lot of money in taxes that could have been easily avoided.

Conclusion & Next Steps

Both of these cases illustrate why you really should get an attorney to handle your divorce, and an accountant to handle your taxes. An attorney will be able to work out these thorny details, and will be sure to put them in writing, and make them part of the divorce decree.

To see more of our advice about divorce and taxes, click here to read our other blog post on the subject.

Want to know more? Discover what you need to know about divorce in Maryland. Click here to see our Free Legal Consumer Guide to divorce cases in Maryland and get answers to your questions today. Click here to read our Free Legal Consumer Guide to Child Custody.

Know your options. Be informed. Protect yourself.

Need a divorce lawyer or child custody attorney? Please contact us for a consultation today if you need a Maryland divorce lawyer for your family law case.

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