HOW TO PAY YOUR FORMER SPOUSE’S DEBT…
HOW TO PAY YOUR FORMER SPOUSE’S DEBT….
AND GET A TAX DEDUCTION
Question: Early in our 16 year marriage, my wife’s mother loaned us $25,000, and my wife and I signed a joint note which has never been paid. My mother-in-law never asked for a payment until my wife and I separated. Now she wants not only the $25,000 principal, but also interest for 16 years. I don’t mind making payments to my wife’s mother so long as they are tax deductible to me. My wife doesn’t work outside the home, and I will be paying her alimony anyway. Can this be accomplished as part of our divorce settlement?
Answer: So long as all requirements for alimony are met, payments to a third person "on behalf of a spouse" according to the terms of a divorce or separation agreement will qualify as alimony. If you agreed 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 if it was your debt, the payments would not be deductible alimony since they would not be considered as payments made "on behalf of a spouse" -- even if made according to the terms of a divorce agreement.
Here, since you and your wife both owe your mother-in-law according a joint note, the part you pay to your mother-in-law on behalf of your wife could be alimony that would be taxed to your wife, but the portion of the debt you pay to take care of your share would not qualify. To make the entire amount qualify, you and your wife might consider her assuming the entire debt and you making the payments as alimony provided for in the divorce agreement. In this way, your mother-in-law would receive the sums due her, you would receive a tax deduction, and your wife would pay the taxes on what you pay your mother-in-law. But remember, because of the intricacies involved – such as making sure that the payments to your mother-in-law terminate on your wife’s death in order to qualify as alimony, we do not suggest that you take any action without the advice of your attorneys and a certified public accountant.
Jan Collins Stucker is an award-winning writer and editor. Jan Warner is a matrimonial, elder, and tax attorney. Both are based in Columbia, South Carolina. Flying Solo is seen in newspapers throughout the United States and can be found on the Internet at http://www.flyingsolo.com.
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