Jim and Linda are your tax clients. They were divorced two years ago, and the divorce decree stated that Jim was to make monthly payments to Linda. The court designated $300 per month as alimony and $200 per month as child support, or a total of $6,000 per year. Jim has been unemployed for much of the year and paid Linda $2,000 that he said was for child support. In addition, Jim transferred the title to a three-year-old automobile with a $4,000 FMV and basis of $7,000 in exchange for her promise not to pursue any claim she has against him for the unpaid child support and alimony. Does Linda have to report any alimony and is Jim entitled to an alimony deduction? Draft a memo for the file that discusses the tax consequences for both Jim and Linda.
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