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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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How do I write off alimony that was paid out of an existing

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How do I write off alimony that was paid out of an existing 401K plan, Because the money from the account was not taxed when it was put in the account, I know my ex-wife has to pay taxes when she uses it but the money was put in the account from my wages, I had to work for that money....$83,500 dollars should be a write off some how for me. SW
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Lane :

Hi,

Lane :

Here's the IRS guidance on this ... Alimony is most certainly deductible .. AND, you don't even have to itemize to take the deduction ...

Lane :

You do not have to itemize deductions to deduct your alimony payments. You must claim the deduction on Form 1040 (PDF). You cannot use Form 1040A (PDF), Form 1040EZ (PDF), or Form 1040NR (PDF). You must provide the social security number of the spouse or former spouse receiving the payments. If you don't, you may have to pay a $50 penalty and your deduction may be disallowed. from: http://www.irs.gov/taxtopics/tc452.html

Lane :

Now, if the money was distributed to your wife as part of the divorce SETTLEMENT, rather than by your simply taking withdrawals on an ONGOING basis and sending her the alimony payments, that was probably done through something called a QDRO (Qualified Domestic Relations Order). Which simply puts the money into an IRA for her and - without any tax or penalty to you, then SHE will pay the taxes as she pulls it out of her own IRA.

Lane :

But again, if you are making withdrawals on an ongoing basis (paying the taxes on that, the following April, of course), and then sending it to her - you simply deduct it from your income on the 1040 if you don't itemize, or on the 1040A if you do. ... Alimony payment ARE tax deductible ... AND she must pay tax ON that income as well.

Lane :

Questions?

Lane :

I still don't see you coming into the chat here, ... So to recap, if this is a lump sum amount being done as PART the divorce settlement, you want to be sure that your attorney makes sure - or if you're doing this yourself, make sure the judge - does this through a QDRO (pronounced Quadro) - This would be typical operating procedure for divorce proceeding where part or all of the 401(k) to is awarded to the other spouse ... and that is not taxable to you ... in this scenario, YOU got a tax deduction on the money as it went into the 401(k) ... pre-tax contributions ... and SHE will pay the tax (and penalties if she's under 59 and 1/2) when she pulls it out.

Lane :

And if you're talking about alimony PAYMENTS into the future, those ARE tax deductible ... again here's the IRS guidance: http://www.irs.gov/taxtopics/tc452.html

Lane :

I still don't see you coming into the chat session, so I'll move us to the "Q&A" mode. … Maybe that will help … (We can still continue a dialogue there, just not in real-time chat, as we can here) … Please let me know if you ave ANY questions at all.

Lane :

Again, let me know ...

Lane :

Lane

Expert:  Lane replied 1 year ago.

 

Hi Stan,

 

... just checking back in here, as I never did see you come into the chat.

What happens now?

If you haven’t already done so, please rate your answer above. That's the only way we get credit for our work

 

Or, you can reply to me using the box below, if you have any questions at all.

 

Let me know...

 

Lane

 

Customer: replied 1 year ago.


so if the money is transfered to her through a QDRO as it was, I still write it off? I guess I wasn't understanding that. The money was mine, court ordered me to pay, I paid in a lump some by way of QDRO.

Expert:  Lane replied 1 year ago.
No, sorry, if I wasn't clear either. The quadro does let you get it to HER, without having to distribute, tax and penalize first, but there's no additional write-off.

I guess the policy/thinking is that you DID get the money in there pre-tax and SHE'LL be the one paying taxes and penalties to get to it.

I hope you'll rate my answer on its accuracy and thoroughness, rather than any good news / bad news content (Hope having all the facts will help you "see around some corners."

Alimony itself IS deductible

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4544
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 9 other Tax Specialists are ready to help you
Customer: replied 1 year ago.


seems strange...I take a $83,500 loss in my property, income, give it to her.....I have no write off at all?

Expert:  Lane replied 1 year ago.
Settlements are never deductible. It's an awarding property (no tax no deduction) in the case of a qualified plan they do the quadro, so you aren't punished by being taxed and penalized for property you're being forced to give away.

I just broke out of a taxation class I teach and am heading back to the office. I'll send you the tax regs when I get there

Lane
Expert:  Lane replied 1 year ago.


Sorry Stan,

... back in the saddle now.

Again, a property settlement in a divorce is not taxable ...

For example, if you had to split up land in your name and give her 1/2 ... that would not be taxable to her, nor would there be a tax deduction for you.

The thought is ... that a divorce property settlement is an awarding of property that was bought with after tax dollars. For most property, the tax has already been paid on the income (withheld from your paycheck, for example) that was used to buy that property.




The QDRO, as it is used with qualified plans, is just a way to make the awarding of some or all of a qualified plan exactly the same as any other settlement award ... (the person getting it will have the tax implications of selling it or using it)




For example ... in the land example, above, her tax BASIS in the land would be the same as it always was, so that if she sells the land, SHE has to pay the capital gains on that property... even if you originally bought it for a dollar.

Here's a great article on that issue: http://divorcesupport.about.com/od/taxesanddivorce/f/settlementtaxes.htm






In the case of the QDRO,you actually get 2 (VERY SMALL) breaks, compared to all the other property settlements ...

(1) where the land goes to her AFTER you paid taxes on your income (salary or whatever bought that land) ... you acquired the 401(k) with Pre-tax dollars.

(2) This one's really more of a bad deal for her that a break for you, ... but on the land, if she sells it she only pays the lower capital gains tax ... on the 401(k) it's all ordinary income AND that pre-59 and 1/2 tax penalty on top her regular income taxes, when she uses IT.




Here' the IRS guidance on the three issues here ...

(1) settlements are not taxable OR deductible (including QDROs)

(2) Alimony IS deductible (and taxable to the receiver)

(3) QDROs protect you from being punished twice (having to give away the property AND having it be taxed as well)


http://www.irs.gov/publications/p504/ar02.html#en_US_2013_publink1000176031


http://www.irs.gov/publications/p504/ar02.html#en_US_2013_publink1000175944

http://www.irs.gov/publications/p504/ar02.html#en_US_2013_publink1000176019



And here's a good article on QDROs (used for qualified plans):

http://divorcesupport.about.com/od/pensionfundsandbenefits/f/qdro.htm




Hope this helps

Lane

Positive feedback is appreciated...that's the only way I get credit for the work. Thanks

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Lane
Lane
JD, MBA, CFP, CRPS
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Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986