taxation of alimony - US law

Posted by amax (324 days ago)

hope anybody can provide information:

we are american citizens and live in Asia. My son and I are receiving alimony payment which is transfered to us each month directly from my ex-husbands company - not his private account.

Now my question: must I assume that the money is deducted from his gross salary, so is not yet income taxed hence still subject to tax payment by myself?
Or is it, that I can consider the money send to us as our net income?

Am confused on this point. I've never been involved in (our) money issues and do not get a clear answer from my ex on this either. us being Americans and subject to double taxation, am sure there is a way for him/the company to juggle money around to avoid tax where ever possible (within legal boundaries of course).

Am affraid this is going to be at my and our sons' expenses, even though we clearly agreed in our settlement that whatever we receive from him is net and not to worry about any further!

(I am based in Hong Kong)

Posted by Aijin (partially perpetual) (323 days ago)

As you must know even as a non-resident US citizen you are required by law to file annual independent tax returns if your husband is not filing a joint return on your behalf for all income received be it alimony or not.

To be alimony, a payment must meet certain requirements. Not all payments under a divorce or separation instrument are alimony. Alimony does not include child support and non cash payments and settlements… if your husbands company is paying you then the payments you are receiving are definitely not classified as alimony. Alimony is gross income and taxable regardless.

You need an accountant and a lawyer and a good one….

Best of luck.

(I am based in Unspecified)

Posted by amax (323 days ago)

thank you very much. our divorce is only effective since early 2007 and all financial issues regarding 2006 have been taken care of by my ex husband.

our settlement states that my child and I each receive a monthly maintainance sent as one sum to me.
The amount is defined as two, as conditions for stopping to pay to either me or the child differ.

So how to do, to still receive that money net? Demand amount is adusted to meet agreed net after tax? Would this be reasonable and stand a chance if I renegotiate our settlement?

(I am based in Hong Kong)

Posted by Aijin (partially perpetual) (323 days ago)

It does not matter as any income you receive is taxable... and gross unless your husband files a joint tax return on your behalf.

Basically and apologies you are responsible under law to file a tax return yourself stating all and any income received.

Child support is not deductable but payments to you is - this why it is defined as two.

You have to pay tax end of subject. Get an accountant to file your tax returns and a bloody good lawyer if you want to think about attempting to renegotiate your settlement. If your husband is in HK it will make things a lot easier than if he is Stateside...

Your divorce lawyer should be able to help but if he/she negotiated this settlement in the first place then I would definately seek a third party opinion.

Once again the best of luck and apologies but really you should have thought about this before you agreed on the settlement.

And if you received a lump sum payment that also btw is taxable.

Ouch. *SMH*

(I am based in Unspecified)

Posted by Oski (323 days ago)

I might be wrong, but I don't think there is such a thing as "Payment net of taxes" as far as IRS is concerned. (it is a common mainland Chinese practice.) As Aijin mentioned before, as a US citizen you are required by law to file income tax return. So nothing short of renouncing you US citizenship will absolve you of that headache.
If your alimony is negotiated as "net of tax" the most like way it is implemented is that your ex-husband's company has paid withholding tax on your behalf. So sometime early next year, your ex's company will mail you a statement similar to a W-2 form. It will have a full accounting of all money paid to you and to the government. You will then fill those numbers in your tax return. In that case you will mostly get a little extra money back from Uncle Sam. Most company's tend to over withhold a bit of tax, and you can get that back from the government by filing a tax return.
BTW, as US citizens, you are not "double" taxed. Just "global" taxed. The taxes you pay to Hong Kong (if any) can be claimed as a "credit" against US tax liabilities. So you pay the difference between US and HK taxes, not both.
You'd best hire a US tax accountant at least for your 2007 tax return (Deadline is Apr 15, next year. Overseas residents get an extension to Jun 15) It appears you married a US citizen and have never filed for taxes yourself. It can be frustrating task for the uninitiated.

(I am based in Hong Kong)

Posted by amax (323 days ago)

Aijin & Oski: thank you both for reply. matters are much clearer now and i got myself already a list of tax accountants via the embassy.

Just one last thing to have an upfront information; can you estimate the charge to get a tax return done by an accountant service - if done in HK?

hope not an arm and a leg :)

(I am based in Hong Kong)

Posted by Aijin (partially perpetual) (322 days ago)

In your case I would not have a clue… and yup it could cost you both arms and legs…

Your divorce settlement must have covered what to do with your taxes and who will claim your son as a dependent on the tax returns. For example if you have joint custody your husband may claim him as a dependent one-year and you may thus only claim him as a dependent in the subsequent year. Alimony received is taxable as ordinary income. The payer of alimony receives a tax deduction. What you file must thus correspond with what your husband files.

I would guess that your accountants will need to obtain copies of your previous tax returns before they can start to work out what you are and are not entitled to claim. You can obtain tax transcripts upon submission of your SSN unless of course he did file as married filing separately and classified you as a NRA spouse.

You state that it is your husbands company that is paying the monies to you and that could mean that you are a non-resident independent contractor rather than a dependent. Your monies could as Oski noted have tax withheld or they could be merely out-sourcing expenses. And again as Oski noted if you receive any income from another source in HK or wherever then you will have to declare this income to get foreign tax credits.

The divorce agreement should also have spelt out what happens if any additional interest, penalties, or taxes are found, as well as where the money comes from to pay for defending an audit. There are countless horror stories where the unsuspecting spouse (usually the ex-wife) is all of a sudden obligated for a huge tax bill. For up to seven years after the divorce, the IRS can perform a random audit of your last joint tax return. If a spouse files bankruptcy after divorce the creditors will seek out the other spouse for payment – no matter what was agreed to in the separation agreement.

I cannot believe that your divorce lawyer did not explain any of this to you. You need to seek professional advice. And btw you may need to check your residency status in HK as if you have a dependent visa this would be effected by the divorce.

(I am based in Unspecified)

Posted by SWTFP (322 days ago)

Dear Amax:

We are a tax consulting firm specialized in U.S. taxation of foreign income and international transactions.

Please be advised that alimony paid to you is gross income to you and is taxable to you. At the same time, alimony paid by your ex-husband is adjustment to gross income and is deductible by him. Child support is not taxable to the receipient and is not deductible by the payer.

Hope the above clarifies.

= = = = = = = = = = =
Brian Wong, US CPA
= = = = = = = = = = =
Southwest Tax & Financial Planning Limited
8/F., New York House
60 Connaught Road Central
Hong Kong

Tel: (852) 2575 5800
Fax: (852) 2523 6800
Email: swtfp@netvigator.com
Website: www.yp.com.hk/swtfp

(I am based in Hong Kong)

Posted by gdbill (322 days ago)

"if your husbands company is paying you then the payments you are receiving are definitely not classified as alimony"

This is not true. Regardless of where the money comes from, if it is a payment made to settle an obligation for spousal maintenance then it is considered alimony. It is extremely common to have the debtor (husband, in this case) authorize payments on his behalf by his employer or third party source of income to the creditor (wife).

While child support is not taxable (nor deductible), alimony is taxable and must be reported.

(I am based in Guangzhou)

Posted by Aijin (partially perpetual) (322 days ago)

Apologies for the confusion… I read it that the money was coming from the company independently of the spouse - as alimony is gross but compensation received from a company could be a net amount akin to take-home pay after reductions, taxes and deductions.

Again it is all dependent on what the divorce settlement states - if it does not state the monies are alimony it is not alimony.

I dread to think what she has agreed to in the divorce settlement if she has accepted “we clearly agreed in our settlement that whatever we receive from him is net and not to worry about any further!...”. What on earth were her lawyers advising her – take the money and run/a slow boat back to China?

It does seem a case of an extremely naïve wife not seeing the wood for the $ per say and a spouse who just wanted to pay her off… This should have been dealt with before the settlement was signed and sealed.

(I am based in Unspecified)

Posted by gdbill (322 days ago)

If and when the IRS puts the bite on her for tax evasion and she pulls the old story about the divorce decree stating that her alimony is net, I'd like to be there to laugh my rear off. ;)

(I am based in Guangzhou)

Posted by Aijin (partially perpetual) (322 days ago)

I am surprised Hubby, his accountants and lawyers managed to keep a straight face when she accepted it…

Just imagine how much of the pay-off the inevitable audit is going to cost her... I am sure Hubby will have covered his a$$... after all that is why most divorce settlements make the final or next tax return joint and part of the settlement...

Methinks this divorce was not exactly amicable and Hubby is exacting a tad of revenge…

(I am based in Unspecified)

Posted by gdbill (322 days ago)

You could be right. I do think that the former Mrs. isn't exactly the sharpest knife in the drawer either.

(I am based in Guangzhou)

Posted by Aijin (partially perpetual) (322 days ago)

Custody for the kid should be next... eek.

(I am based in Unspecified)

Posted by amax (319 days ago)

wow. thanks for so many constructive replies and even the to mean ones I'll give meaning and pay consideration.

SWTFP: thanks for clearing all in one sentence. I will check your companies web-site and if you have an office in the city I'm living (it's not Hong Kong) I'll certainly contact them!

(I am based in Hong Kong)