TECHNICAL GLOSSARY

Deductions for Court-Ordered Payments: What You Need to Know

Payments imposed by the court come about when the court orders payments from a person or business for fines, restitution, or other legal obligations. Examples of types of court-ordered payments include those resulting from a felony, misdemeanour or civil suit; separated divorces; possession of a vehicle registered in another state, and any number of other types of legal proceedings. It is important to understand if the person or business is in compliance with their legal obligations and/or if the payments made could be treated as tax-deductible by the IRS in making determinations regarding payments.

What Is Court-Ordered Debt?

Debts resulting from a court's ruling could involve:

• Administrative costs incurred whilst attending court;
• Fines imposed for either civil or criminal offences;
• Restitution owed in general to persons injured due to crimes committed by the defendant.

A person who has committed even minor traffic offences could be charged interest on these outstanding debts should they fail to make payment. Furthermore, failure to pay outstanding amounts to satisfy court decrees will negatively impact a debtor's credit, their ability to find employment, and their ability to obtain suitable housing, as well as their driver's license.

How to Pay Court-Ordered Debt

1. By Using Postal Services
   If you send a cheque or money order via the US Mail, including a return receipt will provide evidence of payment received by the court or collection agency. This process will create an accurate and legal record of your payment.
2. Electronic Payment Methods
   Many counties permit payment online. To make an electronic payment you will primarily provide the following information to locate your case:
• The County or jurisdiction where the fine was imposed
• The case number and type of charge (Traffic, civil or criminal), or
• Your full name for a case search if you do not have the case number.

Once the case is located, payment can be made securely over the Internet and an electronic payment receipt can normally be produced for a nominal fee.

Are Court-Ordered Payments Deductible?

There are cases where a taxpayer can claim a tax deduction on their tax return for amounts paid as a result of a court order or legal settlement. The following IRC sections may apply to the payments:

• Business expense deductions under IRC 162 (ordinary and necessary costs associated with operating a business) may include certain amounts paid pursuant to a court order.
• Under IRC 212, expenses incurred in generating a taxable gain or producing taxable income may also be deductible

Depending on how the payment was made and for what purpose, both compensatory damages and punitive damages could qualify for tax deduction treatment.

Important Considerations

• Keep detailed records both receipts of all payments made for tax reporting purposes and to prove compliance.
• Talk to a tax expert to confirm if your payment meets the criteria to qualify as either a business or income expense deduction.
• Not paying court-ordered debts can result in legal problems, penalties, or possibly having your wages garnished.