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Alimony Payments and Tax Deductions
Jan L. Warner & Jan Collins

Question: During our three-year marriage, my wife incurred a lot of debt – more than $15,000 on credit cards, charge accounts, etc. Thankfully, we do not have any children. We are in the process of divorce. Although my wife works, she doesn’t make a lot of money and can’t afford to make the payments and still support herself. My lawyer tells me that I may be responsible for some of these debts because we were married. I am willing to pay part of the debts if the payments are tax deductible to me and if I make the payments directly to the creditors because I do not trust my wife. My lawyer tells me there is no way to do this. Can this be accomplished as part of our divorce settlement?

Answer: We disagree with your lawyer. If all requirements for alimony are met, your payments to a third person "on behalf of" your spouse according to a divorce or separation agreement will qualify as tax deductible alimony. Therefore, if you agree to pay a debt for which your spouse was obligated according to the terms of your divorce or separation agreement, these payments would be tax deductible to you and taxable to your wife – assuming the agreement was worded properly. But to the extent the debt might be yours, your payments would not be deductible alimony because they would not be considered to be payments made “on behalf of a spouse” -- even if made according to the terms of a divorce agreement.

Therefore, the first order of business is to determine which obligations are yours and which are hers. You and your wife might consider her assuming all debts and you making payments of some accounts as alimony. In this way, the creditors would receive the sums due them, you would receive a tax deduction, your wife would pay a part, and your wife would pay the taxes on what you pay on her behalf. But remember, if your payments to your wife’s creditors do not terminate on your wife’s death, they will not qualify as alimony. You might want to maintain a policy of life insurance with your wife as beneficiary to handle this contingency, but take no action without the advice of qualified attorneys and certified public accountant.

Question: When my wife and I signed an agreement in 1999, it was on the condition that the payments I made to her were tax-deductible as alimony. But my deduction has been disallowed – even though there is a court order approving our agreement which classified the payments as "alimony." I called my lawyer and found that there was a clerical error made in one of the drafts which had deleted the provision that my obligation would terminate when my now ex-wife died. My former wife’s lawyer has refused to correct the error. What can I do?

Answer: The removal of the "termination-at-death" clause -- by accident or otherwise -- has converted what may otherwise have been taxable - deductible payments into what may are non-taxable and nondeductible payments.

Your remedy: Ask the family court to correct the error which was made due to inadvertence, neglect, or mutual mistake and to change the agreement and court order retroactively to conform with your agreement. If the time limit has expired based on the law of your state, you might be out of luck and may have to look to your lawyer for the difference between what your after-tax cost would have been and what it is now.

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Suggested Reading:
Separation and Divorce Guidebook
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FS-Be Wary of Credit Issues with Ex
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FS-Becareful of Bargaining Away Alimony As Child Support
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FS-Lawyer Tells Me to Lie & Pension Double Dipped
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FS-The Dangers of Family Loans
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