Here's a story that points up the importance of complying with the letter of the law — when it comes to tax deductions.
Dexter had been divorced from Dora for a number of years, and had dutifully paid alimony the entire time, according to what was in his divorce decree. He rightfully deducted these payments every year on his tax return. Those who pay alimony are allowed a deduction, while those who receive it must report it as income.
In 2001, Dexter wanted to help Dora, who was experiencing financial difficulties. He agreed to increase the payments he made to Dora, and that year he paid $20,000 more to Dora than he had paid in previous years.
When Dexter told his tax advisor that his alimony deduction would be $20,000 higher for 2001, he received the bad news: None of the extra alimony was deductible.
To be deductible under the tax law, alimony payments must be "under a divorce or separation instrument" — such as a divorce decree, temporary order of support, or a written separation agreement. If alimony payments are not found in one of these three writings, they are not deductible alimony for tax purposes. (Alimony payments must also meet certain other tax law requirements to be deductible.)
With regard to the $20,000 extra he had paid, Dexter was out of luck.
TIP: Before making extra payments, be sure to consult your tax advisor, who can advise you as to the tax consequences of your actions.
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