Friday, October 01, 2004

Tax Consequences of Temporary Support A divorce frequently takes months, and sometimes years, to resolve from the date of separation or filing until the divorce is final. Usually, the lower income spouse needs to receive support until the final decree occurs. Court-ordered spousal support payments that are made between the date of separation and the final decree are known as temporary support payments. Temporary support payments qualify as taxable alimony (taxable to the recipient and deductible to the payor) only if they are paid because of a decree by a court. These decrees include interlocutory decrees and other decrees except final decrees of divorce or separate maintenance. Voluntary payments that have not been ordered by a court do not qualify as taxable alimony. If the parties have not completed the divorce or become legally separated by December 31 of a particular year, they do not qualify as single for tax purposes and are still eligible to file a joint return. If they file a joint return for a year in which temporary support has been paid, the temporary support will not qualify as taxable alimony. Thus, for the alimony to be taxable their filing status must be married filing separately. If the divorce is final by December 31 of a year, the temporary support paid under a decree will be taxable to the recipient and deductible to the payor for the tax year. Temporary support payments that qualify as taxable alimony are not subject to the alimony recapture rules. To qualify as taxable alimony, the temporary support payments must be made in cash or cash equivalents (i.e., checks or money orders payable on demand). Transfers of services or property will not qualify as alimony or separate maintenance payments. Likewise, a debt instrument for the benefit of the spouse receiving support or use by the receiving spouse of property does not qualify as alimony. Payments to third parties can qualify as alimony. Payments by the provider of support for such expenses as a spouse’s rent, mortgage, taxes, or tuition qualify as alimony. However, payments of the mortgage, real estate taxes, or insurance on property owned by the provider of the support are not payments on behalf of the spouse and do not constitute taxable alimony even if they are made under a judge’s decree. Payments of premiums on whole or term life insurance on the provider’s life will qualify as alimony paid to the spouse only if the spouse is the owner of the policy. Payments by a provider of support to any third party under a written request, consent, or ratification by the receiving spouse also qualify as alimony. 12:43:44 PM

Family CPA Has Conflict Taking Sides In Divorce. Federal Law Prevents Harassing Calls. Question: When my husband and I decided to call it quits, he hired the CPA who had advised us and filed our personal and corporate tax returns for the past ten years to help him in our divorce case. This CPA is now valuing our business, tracing the purchase of assets, and giving tax-related opinions in court – most of which are very detrimental to me. Throughout the years, I have had many conversations with this CPA and have delivered personal information to his office about my inheritance and gifts from my family, but he refuses to make any information available to my lawyer without a court order or subpoena – even though I gave him the only copies I had. This does not seem right to me. How can a professional who worked for both of us choose sides and what can I do? Answer: In our view, a certified public accountant who has prepared joint income tax returns for and given advice to a married couple has a serious problem choosing sides at divorce and becoming adversarial to one of his clients. As a client, you are entitled to not only the returns and all schedules, but also all work papers, notes, and every piece of information in that CPA's files. In court, financial experts can be attacked on cross examination in four areas: qualifications, independence, the assumptions used, and subjective judgments. Here, it appears that if this CPA testifies or gives affidavits, his lack of independence will surely taint his opinions in the eyes of the court. We believe that he should be given one last opportunity to remove himself from participating in your case. If he refuses, we suggest that your attorney seek an order from the court requiring the CPA to turn over all of the records and disqualifying him from participation in the case. If he persists, we believe he is leaving himself open to a lawsuit. Question: My husband's former wife, who moved to another state after their divorce, calls me constantly, cursing and berating me and threatening to do harm to me. I receive "hang-up" calls at all hours of the night. I have been to local law enforcement and although my state has a law against harassing and threatening telephone calls, since this woman lives in another state, law enforcement tells me that nothing can be done. Is this true? Answer: No. Federal law prohibits obscene or harassing or threatening telephone calls that are made in interstate or foreign communications. Under this law, it is illegal for a person to use the telephone (a) to make obscene, indecent, or lewd comments; (b) to annoy, abuse, threaten, or harass a person whether there is conversation or not; and (c) to cause another person's telephone to repeatedly or continuously ring. The penalties can be a fine of up to $50,000, six months in prison, or both. We suggest that you contact the Federal Bureau of Investigation or United States Attorney in your area and seek enforcement of your rights under this federal law. Question: My wife and I are completing a settlement which includes alimony and child support. I am willing to pay her more money during the first several years when she will need it most in consideration of paying lesser amounts after she gets on her feet. Try as I might, I can't understand why we can't do what we want to do and still keep the payments deductible. Isn't there a simple explanation that can satisfy my basic need for information? Answer: Unfortunately, nothing is "simple" when it comes to the taxation aspects of marital settlements. Assuming they qualify under the tax law, alimony payments are deductible by the payor in the year paid and includible in the income of the recipient in the year received. Child support payments, on the other hand, are neither deductible nor includible. To qualify as alimony, each of the following requirements must be met: (1) Payments must be made according to a divorce decree or separation agreement signed by the husband and wife; (2) Payments must be in cash; (3) Payments must terminate at the death of the recipient; (4) Husband and Wife can't file joint income tax returns with each other; (5) Generally, Husband and Wife must live separate and apart; (6) Payments can't be designated as "child support" or as not being alimony; and (7) Payments may not be made from alimony trusts. Regardless of the reasoning behind you wanting to make larger payments during the first few years, there are rules that prevent what is known as "front end loading" -- that is, where, as you have described, the payor makes larger payments during the first few years after the separation or divorce -- which increases the deduction -- and then decreases or terminates the payments. In these situations, a part of the large payment in the early years may later be treated as property settlement which is not deductible by the payor and is not taxable to the recipient. This means that if you deducted -- and your wife reported -- the large payments, you might be required to "recapture" previously deducted amounts into your income and pay additional taxes. At the same time, your former spouse would receive a refund. Since this result is certainly not what you intended, we suggest that you "leave the driving" to an experienced matrimonial lawyer and certified public accountant who can make sure your intentions are carried out. Jan Collins Stucker is an award-winning writer and editor. Jan Warner is a matrimonial, elder law, and tax attorney. Both are based in Columbia, South Carolina. Flying Solo is distributed nationally by Knight-Ridder/Tribune Service. 12:43:44 PM

Alimony Payments and Tax Deductions 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. 12:43:41 PM