figure out deductions on alimony-mortgage

            Posted on May 29, 2016 

Figure out deductions on alimony, mortgage-  2 articles

Q. My divorce judgment orders me to pay alimony, plus the mortgage principal, interest, real estate taxes, and insurance on our marital home.
Can I deduct any of the house-related payments?

A. If the house is owned by your ex-wife, everything you pay for those expenses is alimony; which is deductible on page one of your income tax returns.
If you own the entire home, you cannot deduct any of those payments as alimony. But you can still claim the mortgage interest and real estate taxes as deductions.
But if you still jointly own the property with your wife, you can deduct half of all the payments as alimony and the other half of the mortgage interest and real estate taxes are still deductible on your tax returns.

Q. I’m a U.S. citizen who is about to get divorced from my wife, who is a citizen of the United Kingdom. She’ll be moving permanently back to the UK after the Court issues our divorce judgment.

After she moves to the UK, can I still deduct the alimony I’m going to pay her?

A. When “U.S.-source income” is used to pay alimony to a non-U.S. resident, you have to withhold 30 percent. That withheld money must be sent to the IRS as the recipient’s tax on that alimony. The percentage can be reduced if the recipient files IRS Forms referring to a tax-treaty that permits a lower withholding rate.

The applicable 2001 U.S.-UK tax treaty provides that: Alimony paid by you to your ex-wife in the UK is not taxable in either country unless you can deduct that alimony on your U.S. tax return; and if you can deduct the payment, then your ex-wife must pay income tax in the UK on that alimony. That means you don’t need to do any withholding. But your ex-wife will have to file two complicated IRS Forms.

So how can this work to your advantage? U.S. tax law permits you and your wife to agree that the alimony you pay will not be deductible on your tax return, nor included as income on her tax return. If she wants to avoid withholding, filing U.S. tax forms, and paying taxes in the UK on that alimony, she should agree to reduce your alimony by thirty percent or more.

But before you make any such offer, ask your CPA to determine if deducting the alimony puts you in a lower income tax bracket. But be careful because your CPA will get excited about all this “tax talk”.