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11.11.

2014
To
Jim and Linda
From
Aleshia Cooper

Brief Summary of Facts:


Jim and Linda are your tax clients. They were divorced two years ago, and the
divorce decree stated that Jim was to make monthly payments to Linda. The court

CC
Lynigueka Johnson;
Rechea Delancy

designated $300 per month as alimony and $200 per month as child support, or a total

Re
The tax
consequences

$2,000 that he said was for child support. In addition, Jim transferred the title to a

of $6,000 per year. Jim has been unemployed for much of the year and paid Linda

three-year-old automobile with a $4,000 FMV and basis of $7,000 in exchange for her
promise not to pursue any claim she has against him for the unpaid child support and
alimony.
Issue:
Does Linda have to report any alimony and is Jim entitled to an alimony deduction?
Law and Analysis:
According to the tax law, it has rather specific rules that distinguish alimony,
child support, and property settlements. Under current law, in order to be treated as
alimony, payments must meet all of the following requirements: Be made in cash (not
property), Be made pursuant to a divorce, separation, or a written agreement between
the spouses,

Terminate at the death of the payee, Not be designated as being other

than alimony (e.g., child support), Be made between people who are living in separate
households.

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

Thompson Blvd, Nassau


Bahamas N 4912

Taxation1@gmail.com

11.11.2014

Memorandum to File

02

Analysis:
Child support payments are not included in gross income. As cash payments were
designated as maintenance by Jim, this characterization is likely that should be
followed. The transfer of the car probably is not taxable as income from alimony as
alimony rules require that such payments made in the form of cash. It is clear that Jim
is not entitled to deduct any of the payments. If Linda is committed to writing Jim may
receive an exemption from dependency and child credit.

The fact that he was

unemployed most of the year, however, can mean that it owes little or no tax, and that
would not benefit from additional deductions or credits.