A 2017 U.S. Tax Court ruling involving an estranged California couple held that any spousal support payments made from one spouse to the other as part of a divorce must be included in a divorce agreement in order to be tax deductible. In the case, a man found that he was not able to claim the bonus he split with his ex-wife on his taxes. He was not able to claim it because it had not been documented in the divorce papers.
Alimony is deductible to the person who is making the payments as long as it meets some specific requirements. First, the payments must be included in a separation or divorce agreement. Second, the document cannot make claims about the payment not being taxable or deductible. Third, when the payer gives the money to the recipient, the two cannot be living in the same house. The obligation must end when the recipient dies.
Although in the case of the large bonus the two spouses did sign an agreement stating that the bonus was community property, that document did not count as a separation or divorce instrument. For that reason, the large sum the man had paid to his ex-wife was not tax deductible. In order to avoid a problem like this, a person in this situation should make sure that all spousal payments are covered in the divorce agreement.
Individuals who considering divorce might be unsure of how to prepare agreements that include all information about alimony or child support. In this case, it may be a good idea to consult a family law attorney who could draw up these documents with the terms specific to the client’s case.