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!
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
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
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.
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
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.