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Tax Talk with George Saenz

Ask the tax adviser

Alimony to an overseas ex

Dear Tax Talk:
Can my husband deduct an alimony payment to his ex-wife who lives overseas? She is neither a citizen nor a resident of United States.
Thanks for your help!
Mary Jane

Dear Mary Jane:
Yours is a very simple question and very perceptive. Of course, it may stir up trouble with the ex, but there may be a requirement on your husband's part to satisfy a withholding tax obligation. If unfulfilled, this duty to withhold tax can create an additional liability for both of you above the alimony paid.

I recently discussed when payments to an ex-spouse meet the requirements to qualify as alimony. Assuming the payments meet these requirements, then your husband is legally required under Internal Revenue Code Section 1441 to withhold 30 percent of the payments as income tax. Your husband is also entitled to claim a deduction for the alimony payments.

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The tax withheld is required to be paid over to the Internal Revenue Service. Form 1042-S and its instructions advise of the responsibility to withhold income tax on payments to non-resident aliens and foreign businesses. Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Corporations, at page 13 discusses the requirement to withhold tax on alimony as well as other types of income paid to non-resident aliens.

Writing off bad loans to corporations

Dear Tax Talk:
I invested in a restaurant that filed Chapter 7. I had also loaned the corporation money. What am I able to deduct as a loss?
Thanks in advance for your help.

Dear Tim:
The glamor of owning a restaurant draws many to believe that it is an investment. My experience has been that it is equivalent to inviting people to eat and giving them money (your investment) when they leave. Fortunately or unfortunately when the glamor is gone, the investment is worth some tax savings.

First of all, your write-off depends on the type of corporation. If the business is a Subchapter-S corporation, most of your deductions will come back to you as ordinary tax deductions as opposed to capital losses. Ordinary deductions are better than capital losses as the latter are limited to the extent of your capital gains plus $3,000. If the corporation did not elect to file as a Subchapter-S corporation, your investment may be deducted as a capital loss.

If the original investment was properly structured, it may qualify for a tax break afforded to start-up ventures known as Section 1244 loss. The rules regarding the availability of Section 1244 losses are extensive. These rules are discussed in part beginning on page 48 of Publication 550, Investment and Income Expenses. If you qualify to treat the loss as a Section 1244 loss, you can write off up to $50,000 (or $100,000 in the case of a joint return) of your investment in stock (not loans) as ordinary deductions vs. capital loss.

Even though the corporation filed for bankruptcy, you should get with a qualified accountant to file income tax returns to maximize your deductions as well as satisfy IRS filing obligations.


-- Posted: Jan. 16, 2001

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