Any problem?

[NotEasy]

Taxpayer divorced her husband in 2006. During the marriage they had make stock investment together at a loss. It was determined in their divorce settlement that taxpayer had to paid her ex-husband $10,000 for her portion of the loss and this is put as one of the stipulations in their divorce agreement. Taxpayer paid the $10,000 to her ex-husband in 2006 and claimed that $10,000 as capital loss (deducts $3000 and carryover $7000 to next year) in her 2006 tax return. Any problem?

[Jiggers]

Not deductible

Taxpayer divorced her husband in 2006. During the marriage they had make stock investment together at a loss. It was determined in their divorce settlement that taxpayer had to paid her ex-husband $10,000 for her portion of the loss and this is put as one of the stipulations in their divorce agreement. Taxpayer paid the $10,000 to her ex-husband in 2006 and claimed that $10,000 as capital loss (deducts $3000 and carryover $7000 to next year) in her 2006 tax return. Any problem?

My understanding is that payments made to one spouses by the other spouse is not income to one, nor deductible by the other.

No deduction for the $10,000 by the wife, not income by the husband.

If the return was filed this way, then an amended return is necessary.

[Uncle Sam]

Any Problem

I agree with Jiggers - as property settlements pursuant to a divorce or separation are neither taxable or deductible.

[Luis Mopeo]

Agree. The payment was a property settlement, not a sale of stock.

[Corduroy Frog]

Not a Total Loss

...just so SOMEbody can salvage SOMEthing out of this non-deductible situation....

If in fact there was a loss, that loss would have been deductible by the registered owner(s) of the stock. You may want to concentrate on taking whatever portion your client shared in the loss of (s)he was part owner.

The settlement itself is not deductible.

[Jiggers]

Assuming that the stock was actually sold in 2006

...just so SOMEbody can salvage SOMEthing out of this non-deductible situation....

If in fact there was a loss, that loss would have been deductible by the registered owner(s) of the stock. You may want to concentrate on taking whatever portion your client shared in the loss of (s)he was part owner.

The settlement itself is not deductible.

Now this assumes that the stock was sold in 2006.

[NotEasy]

Thank you

Thank you for your replies. No, she has not filed yet. I was just thinking what is the correct way to file her tax return. Now I am sure that it is not deductible. I will tell her exactly that. I think there is a good chance that she will take her case to someone else though. (smile)

[DonPriebe]

Looking deeper ...

She already has the right to claim her share of their joint losses on her own return. It sounds like she paid hubby $10K for the right to claim (part of?) HIS share. If this was her intent, it it legal to do so? Sounds like assignment of (negative) income.

Even if it is legal, under what circumstances would it make financial sense? Unless she has her own capital gains that could be cancelled out, she can use this "asset" at most to reduce her ordinary income by $3K per year. At a 33% tax rate she would save $1,000 per year in taxes. That's a ten year payback; longer if we assume any reasonible rate of interest.

There's a lot we don't know about this transaction.

[NotEasy]

She already has the right to claim her share of their joint losses on her own return. It sounds like she paid hubby $10K for the right to claim (part of?) HIS share. If this was her intent, it it legal to do so? Sounds like assignment of (negative) income.

Even if it is legal, under what circumstances would it make financial sense? Unless she has her own capital gains that could be cancelled out, she can use this "asset" at most to reduce her ordinary income by $3K per year. At a 33% tax rate she would save $1,000 per year in taxes. That's a ten year payback; longer if we assume any reasonible rate of interest.

There's a lot we don't know about this transaction.

Well, from what she said, she is NOT going to claim her share of the joint losses. She just wants to claim the $10000 that she paid her ex-husband last year. Looks like she's out of luck in that too.