Buyout of alimony

[Jesse]

Husband paid court ordered maintenance of $150 a month for the last two months of 2009 with the court ordered maintenance to continue for 7 years, which is deductible to husband and taxable to ex.

There is a clause that a lump sum of $11,000 can be paid as a buy out on behalf of the ex's claim. Upon payment the ex's claim for maintenance shall be forever extinguished.

The husband did the buyout in 2010. Can this buyout of $11,000 be deducted by husband and taxable to the ex?

[Corduroy Frog]

Settlement

This sounds more like a "settlement" than "alimony". Doesn't alimony have to continue as periodic payment over a number of years?

[Jesse]

This sounds more like a "settlement" than "alimony". Doesn't alimony have to continue as periodic payment over a number of years?

Yes, that is my understanding. The lawyer assures me that because it would be deductible if periodically paid it will be deductible as a lump sum buyout, but I can't find anything to specifically confirm or deny. It is stated and would be deductible if payments continued. The court document specifically states that this is a buyout of the maintenance agreement, so what would have been deductible is now voided because it is paid at a discounted rate in full?

[dyne]

See Page 12-12 and Pub 504 about RECAPTURE of any alimony deducted if the
alimony decreases or stops.

[JohnH]

Maybe the lawyer would be willing to prepare the return and sign his name to it?......

[Jesse]

See Page 12-12 and Pub 504 about RECAPTURE of any alimony deducted if the
alimony decreases or stops.

Thanks, I did take a look at that but the recapture amount = zero because the amount is less than $15000 to begin with - unless I'm not doing the worksheet correctly.

But I'm still not sure if it would be deductible to begin with?

[Roberts]

If it's part of the divorce agreement, it's legal. Whether the IRS determines they'll disallow it is if an obvious attempt to avoid taxation is in place. For $11,000, I'm guessing that's not the case. In fact I'd bet that claiming $11,000 in one year is far more of a tax burden that if it had been spread out over 7 years.

Settlements like that aren't normal but they aren't obscure. Usually they would have just adjusted the asset totals during negotiations and avoided maintenance (who prefers dealing with their ex for the next 7 years?). I'm guessing they didn't do that because they didn't have liquid assets at the time of the negotiations.