I don’t play golf. Despite growing up in a town with no actual supermarket for years – and yet, three golf courses – I never really moved beyond mini golf.

My father-in-law and my husband, however, like to play golf. I won’t speculate on how well they do – but I will note that there is occasionally swearing and drinking involved. My understanding is those are a significant part of the game for all involved.

As a result, I’ve seen more than one afternoon pro golf game on TV. So, I’ve become more than a little familiar with Mickelson, Furyk, Toms, Els – and of course, Tiger Woods.

The Tiger Woods scandal has, I’ll admit, fascinated me – for much the same reasons as it has gripped most of America. I think we all put Tiger on a pedestal – perhaps, in part, because of the some of the mystery in his life. Following a disastrous and controversial 1997 GQ interview, Tiger hasn’t revealed much about his private life. We have gleaned what we know about Tiger from his tight camp of PR handlers. So, on the night of the accident, I was shocked – shocked! – to learn… that he doesn’t really drive a Buick (my first car was a Buick Regal).

But the press, rather than focus on Tiger’s love affair with his Cadillac Escalade, has been sucked into the soap opera that is Tiger’s quite obviously rocky marriage. A fourth alleged mistress has come forward and now, questions have arisen about whether Tiger’s wife will “stand by her man” a la Hillary Clinton.

The notoriously private golfer is now reportedly negotiating a $5 million payout to his wife, Elin Nordegren, to induce her to stick around and an additional $55 million more to stay married for two more years. Why so much? To keep the prenup intact.

Which brings us to the question on everyone’s mind: what are the tax consequences??

It’s a bit unclear what the tax consequences of the current negotiations would be since we don’t know how Tiger and his wife arrange their finances.

But the whole thing got me thinking: are payments to your spouse during marriage considered a gift or a settlement? Usually, because of the relationship, money that changes hands between spouses during the course of a marriage is considered a gift. In that event, for purposes of gift tax, there is an unlimited exclusion for gifts to a spouse, assuming that the spouse is a US citizen (that came in handy for Kobe). That’s assuming that Elin is a US citizen. If not, the noncitizen rules would apply: a US citizen can only gift his or her non-US citizen spouse up to $133,000 in tax year 2009 without tax consequences.

But what if it’s memorialized as something more than a gift? It’s clear that payments made during a marriage – even if part of an anticipated separation or divorce – cannot be considered alimony. But can payments made as part of a settlement agreement, even if they’re really hush money, be taxable to the recipient?

They certainly can be outside of a marriage if it can be characterized as payment for services – for example, if I pay you to show up at public appearances, etc. And in certain circumstances, there is an argument that the payment for nonperformance of services could be considered taxable – for example, if I pay you not to come to work anymore.

But as between spouses, I’m really not sure. I guess the bigger question is if you can you pay someone to remain your spouse, is it taxable if you file a joint return? It is good fodder for speculation (and all comments welcome!).

What is much more clear are the tax consequences of a divorce.

For federal purposes, spousal support (alimony) is as an above-the-line deduction for the taxpayer making the payment (check out line 31a of your form 1040). That means that the payer may take the deduction even if he or she does not otherwise itemize. (Hmm, I wonder who came up with that rule?)

On the other side, qualified alimony payments are considered taxable to the recipient.

Not all payments made to a spouse as a result of a divorce or separation qualifies as alimony for the purposes of federal income tax. For payments to qualify, a certain number of things need to happen:

  1. The divorced or separated couple must not file a joint return with each other;
  2. The spousal support payments need to be made in cash or cash equivalent (payments of real or tangible property does not qualify);
  3. The decree of divorce or separate maintenance requires the payment and does not otherwise say that the payment is not alimony (voluntary payments do not qualify as alimony for federal income tax purposes);
  4. If legally separated under a decree of divorce or separate maintenance, the couple must not be members of the same household at the time of the payment;
  5. There is no liability to make the payment after the death of a spouse or former spouse; and
  6. The payment is clearly not child support.

With respect to child support, as indicated just the other day, it is not taxable to the recipient or deductible to the person making the payment.

And of course, legal fees for purposes of a divorce cannot be deducted since those fees are considered a personal expense. However, to the extent that legal or other professional fees may be considered tax advice for the purpose of collecting taxable income (for example, some alimony), those fees may be tax deductible as miscellaneous itemized tax deduction.

Of course, that’s just the federal tax consequences. The treatment of divorce may vary from state to state. Tiger is currently a resident of Florida (where the infamous accident occurred), so those laws would apply. He reputedly left California for Florida for more favorable tax treatment (though it’s my understanding that the divorce laws are more onerous). Though he’s clearly still subject to state and local taxes earned outside of Florida when he plays in tournaments, his endorsement deals (like the one with Buick for $40 million) and other income would be subject to the income tax-free rules in the state of Florida.

It’s all fun and games to speculate about what could happen on the tax side – that is, after all, what I do. At the end of the day, dollars are just dollars. But it’s also important to keep in mind that this is a real person with a real family – there are small children involved. Let’s hope that whatever deal gets worked out reflects that first.

(Hat Tip to Ava George Stewart)

Last Updated on

Author

Kelly Erb is a tax attorney and tax writer.

Comments

  1. The Daily Beast suggests that the 55M is just to prevent her from pulling a US weekly slander campaign – is that really worth it?

  2. Your article is the FIRST that really interested me regarding the Tiger Affair, or should that be AFFAIRS? Have wondered right away if Elin is US citizen and if her citizenship is complicating matters from the initial accident to the REST OF THE STORY! Have been puzzled why she would EVEN entertain renogiating a pre-nup with so much that has come to light. (and a tiny voice inside tells me if she did have any part to play in the accident it was a woman who had reached the end of her rope after being fed a line “it won’t happen again..” The marital assets are HUGE, the dollar figures floating in the press seem very LOW and signing anything would be outside of her interests. BUT if she is an NONCITIZEN that could help explain ALOT, couldn’t it? From why Tiger thought he could behave as he apparently has, to the blackout immediately following the accident, to actual possible financial scenarios in play right now. Could Elin take the children to Sweden or outside the US or if she wants to separate could she be threatened she might be forced to leave to US because of her citizenship? This all happened in Florida afterall. You mention some of the possible tax consequences. Elin if not a citizen of the US could live anywhere, and the Woods have homes outside the US don’t they? So your article says that receipents must claim alimony as taxable income, what about if the receipent lives and is a citizen of Sweden? Those kids have dual citizenship if Elin is still a Swede, don’t they? (may anyway, would be interested to know how citizenship works for the children if a nonUS citizen gives birth in the US and does or does not become a naturalized US citizen. And what happens if she becomes naturalized AFTER giving birth in regards to the child’s (possibly children’s) citizenship(s). I can’t fathom why Tiger would pay any of the “tarts” a dime. If I were Elin, that would only further insult and betray me and incent me to leave the US and take the kids with me, if possible! Considering her desire for privacy rivals or tops her husband’s it seems very logical to me she may want to get out of the US and get her children to a safe haven. Your article touched on one extremely interesting angle. I hope more articles will address this angle. The other angle that seems to have been largely forgotten or lost is the real medical uncertainities that a cheating spouse creates for his wife and possibly children. Multiple sex partners is dangerous. And testing takes two years doesn’t it? And the timeline can slide if a partner continues to cheat, right? Why would Elin agree to sign ANYTHING until she can reach a peace of mind moment to KNOW she or her children have not been physically harmed by Tiger’s cheating? Shouldn’t any financial agreement she is presented right now clearly stipulate that her health must not have been harmed in any way? If, and GOD FORBID, she or one of the children have been harmed physically because of Tiger’s cheating, then tax matters and citizenships are the least of Tiger’s worries!

  3. Jansen,
    It’s my understanding from my colleagues that Florida law considers adultery for purposes of determining spousal support. IF it’s true that they haven’t been married long enough for the prenup, and Elin isn’t bound by it, then she could, in theory, ask for at least half of everything he has and could perhaps get it as alimony. That’s a lot more than $55 million is my guess.
    But if she stays married for the term of the prenup, she’s bound. He would have to pay her to stay married to make it worth her while.
    At least that’s the way that I understand it.
    Or at least that’s the scoop

  4. “and a tiny voice inside tells me if she did have any part to play in the accident it was a woman who had reached the end of her rope after being fed a line “it won’t happen again..”

    I don’t care how many times, with how many girls Tiger cheated…picking up an iron, wood or even a putter IS NOT A VIABLE ANSWER. If it is not okay for a man to do it, then it is not ok for a woman to do it.

  5. Eric Rosenthal Reply

    Thank you for a very interesting article. It got me thinking if Tiger had to make payments to Elin as part of a divorce settlement and she is not a US citizen, would payments in excess of $13K per year be subject to the gift tax?

Reply To Jansen Cancel Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.