Alimony or property settlement?

[mistoffolees]

What is the name of your state? OK

Divorce final in May 07. I was ordered to pay alimony for 4 years in a fixed amount per month. Also, property was split evenly. There's one issue that I've gotten conflicting advice on and I'd be interested in thoughts.

I was ordered to give ex 25% of the after tax amount of my bonus. Bonus amount was not determined until June 07 and was awarded in July 07. This bonus covered the time period April 06 to March 07. Since I filed for divorce in Sept 07, we were only married for half of the period covered by the bonus - which is why my ex got 1/4 rather than 1/2.

Since the bonus will need to be reported as income on my taxes and since the amount was not known at the time the divorce was final, I am inclined to think that it should be considered alimony (percentage of income) rather than property. In effect, since the bonus had not been defined or awarded at the time of the divorce, I don't see how it could be property. OTOH, it's clearly not a recurring payment which would normally apply for alimony.

At this point, one CPA says it's alimony and one says it's property division. Any thoughts?

 

[tuffbrk]

Check out how the IRS defines alimony - www.IRS.gov - that should answer your question.

 

[LdiJ]

What is the name of your state? OK

Divorce final in May 07. I was ordered to pay alimony for 4 years in a fixed amount per month. Also, property was split evenly. There's one issue that I've gotten conflicting advice on and I'd be interested in thoughts.

I was ordered to give ex 25% of the after tax amount of my bonus. Bonus amount was not determined until June 07 and was awarded in July 07. This bonus covered the time period April 06 to March 07. Since I filed for divorce in Sept 07, we were only married for half of the period covered by the bonus - which is why my ex got 1/4 rather than 1/2.

Since the bonus will need to be reported as income on my taxes and since the amount was not known at the time the divorce was final, I am inclined to think that it should be considered alimony (percentage of income) rather than property. In effect, since the bonus had not been defined or awarded at the time of the divorce, I don't see how it could be property. OTOH, it's clearly not a recurring payment which would normally apply for alimony.

At this point, one CPA says it's alimony and one says it's property division. Any thoughts?

I am inclined to view it as a property division (I am a tax professional). However, I would have to look over your entire property settlement to be sure. If there are children, then it could even be viewed as child support, which is also not tax deductible.

What percentage of your income do you have to give her in alimony? If the percentage of your bonus is not exactly the same, that would be another argument against it being alimony.

The most important thing though, is the plain wording of your divorce decree. If the divorce decree doesn't call it alimony, or at least "support" (and not child support) then if you get audited the IRS won't consider it to be alimony.

 

[mistoffolees]

I am inclined to view it as a property division (I am a tax professional). However, I would have to look over your entire property settlement to be sure. If there are children, then it could even be viewed as child support, which is also not tax deductible.

What percentage of your income do you have to give her in alimony? If the percentage of your bonus is not exactly the same, that would be another argument against it being alimony.

The most important thing though, is the plain wording of your divorce decree. If the divorce decree doesn't call it alimony, or at least "support" (and not child support) then if you get audited the IRS won't consider it to be alimony.

The divorce decree doesn't label it at all. There's a section for division of property and then other sections for alimony, division of retirement, etc. Each of these sections are at equal levels. There's no reason from the divorce to believe that it's one or the other. She is getting roughly 35% of net in alimony for the first 18 months, 25% for the next 18 months, and 15% for the last year. Her share of the bonus is 25%.

I was inclined to consider it property division, but she says her accountant is counting it as income on her taxes so she apparently considers it alimony. If she claims it as income and I claim it as a deduction, our alimony amounts will match, so presumably it would not raise any flags?

 

[LdiJ]

The divorce decree doesn't label it at all. There's a section for division of property and then other sections for alimony, division of retirement, etc. Each of these sections are at equal levels. There's no reason from the divorce to believe that it's one or the other. She is getting roughly 35% of net in alimony for the first 18 months, 25% for the next 18 months, and 15% for the last year. Her share of the bonus is 25%.

I was inclined to consider it property division, but she says her accountant is counting it as income on her taxes so she apparently considers it alimony. If she claims it as income and I claim it as a deduction, our alimony amounts will match, so presumably it would not raise any flags?

Correct, if she includes it in income, and you include it in your alimony deduction it won't raise any red flags.

However, that does not necessarily mean that you are home free. The IRS announced at the end of 2007 that random audits are being reinstituted for individual returns. That means that a percentage of all returns, randomly, will be audited, regardless of whether or not they raised any red flags.

However, based on what you said about the percentages, I now think that you have a better shot at getting the IRS to view it as alimony. However, I would want to read your settlement documents before expressing any concrete opinion.

 

[mistoffolees]

Correct, if she includes it in income, and you include it in your alimony deduction it won't raise any red flags.

However, that does not necessarily mean that you are home free. The IRS announced at the end of 2007 that random audits are being reinstituted for individual returns. That means that a percentage of all returns, randomly, will be audited, regardless of whether or not they raised any red flags.

However, based on what you said about the percentages, I now think that you have a better shot at getting the IRS to view it as alimony. However, I would want to read your settlement documents before expressing any concrete opinion.

I'm not sure it would help. My attorney said that it wasn't entirely clear and the CPA said it wasn't entirely clear either. I made great efforts to ensure that things were as clear as possible in the agreement, but this one slipped through.

I think I'm going to go ahead and deduct it, assuming that she's claiming it as income (which is what she told me). Even if I get a random audit, I think I can make a strong case that I made a best effort to find the answer and the feedback I got (including her CPA's efforts) indicated that I was doing it the right way. At least I don't think I'd get hit with penalties for a willful violation.

Thanks for your help, though.