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 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 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 are 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:
- The divorced or separated couple must not file a joint return with each other;
- The spousal support payments need to be made in cash or cash equivalent (payments of real or tangible property does not qualify);
- 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);
- 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;
- There is no liability to make the payment after the death of a spouse or former spouse; and
- 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 a 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)
(Note: The rules governing alimony have changed as a result of the TCJA for the years 2018-2025.)