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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29558
Experience:  Taxes, Immigration, Labor Relations
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I am taking my settlement in cash payments (half of his annual

Resolved Question:

I am taking my settlement in cash payments (half of his annual salary) from my soon to be ex over 10 years. What tax implications will that have for my ex since it won't be taxed like alimony? Will he have to pay taxes on his entire salary? Or will he pay on only the half he keeps?
Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.

LEV :

Hi and welcome to Just Answer!

Customer:

Hi, thank you

Customer:

Do you need more information from me?

LEV :

You need to be clear about classification of these payments - if that is a property settlement - generally it is not taxable - but if that is alimony - they should be included into your taxable income and deducted for the payer.

Customer:

I understand, but, I understand that if you so designate in the divorce papers that the alimony is not taxed with the understanding that the payor will not get a tax benefit it is doable.

Customer:

I'm wondering what the tax ramifications will be for my ex

Customer:

For instance, if he makes 100k and gives me 50k of that will he still pay taxes on the 100k? Or just the 50k he keeps?

LEV :

See for reference the IRS publication 504 - http://www.irs.gov/pub/irs-pdf/p504.pdf
A payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met.
--The payment is in cash.
--The instrument does not designate the payment as not alimony.
--The spouses are not members of the same household at the time the payments are made. This requirement applies only if the spouses are legally separated under a decree of divorce or separate maintenance.
--There is no liability to make any payment (in cash or property) after the death of the recipient spouse.
--The payment is not treated as child support.



Customer:

I have all of that information. It does not address my question.

LEV :

Your divorce decree may not override the tax law. If payments are alimony - these payments are taxable regardless if your divorce decree said otherwise.
Your only concern should be it this is an alimony or not.

LEV :

If payments are classified as alimony - they are deductible for the payer and taxable for the recipient.

Customer:

Please read further in 504

Customer:

Payments designated as not alimony. You and your spouse can designate that otherwise qualifying payments are not alimony. You do this by including a provision in your divorce or separation instrument that states the payments are not deductible as alimony by you and are excludable from your spouse's income. For this purpose, any instrument (written statement) signed by both of you that makes this designation and that refers to a previous written separation agreement is treated as a written separation agreement (and therefore a divorce or separation instrument). If you are subject to temporary support orders, the designation must be made in the original or a later temporary support order.

Your spouse can exclude the payments from income only if he or she attaches a copy of the instrument designating them as not alimony to his or her return. The copy must be attached each year the designation applies.

This is from IRS Publication 504.

Customer:

Whether or not we will classify this as alimony is not the question. Sounds like you haven't run into this before. Maybe I should ask someone else?

Customer:

My question-again- is what are the tax implications for my ex if we structure our settlement in this manner?

LEV :

Your divorce decree may have a clause that these payments are not alimony - that is correct - if that is true - payments are not alimony - see requirement #2 as I stated above. In this case the payer may not deduct these payments as alimony.
Then - you need to verify if these payments are property settlement or a gift.
If that is a property settlement - there will not be any tax implication for either of you.
If that is a gift - the donor might be required to file a gift tax return.

Customer:

So, as I asked above, if he makes 100k and gives me 50k of it for settlement, will he be required to pay on his original salary of 100k? Or does the fact that he is paying a divorce settlement allow him to pay taxes only on the 50k he keeps?

Customer:

Or will he be able to write anything off his end of the year taxes?

LEV :

Property settlement payments are not deductible - he will be taxable on full income - 100k in your example.

Customer:

Thank you

LEV :

Correspondingly - these payment will not be taxable to you as a recipient.

Customer:

Yes. That is my understanding

LEV :

Property settlements may not be treated as alimony. Only payments that met all mentioned above requirements may be classified as alimony and treated as such.
There are many situations when the IRS disallow deductions because payments were incorrectly classified as alimony.
If you are working out the divorce decree - I suggest to have a tax professional review it. There are many situations when divorce attorneys overlook tax issues.

Lev and other Tax Specialists are ready to help you