Actress Amber Heard, who you might remember from That One Movie You Slept Through On A Rainy Sunday Afternoon, and her husband Johnny Depp, who you may remember from Far Too Many Movies You Slept Through On A Rainy Sunday Afternoon, finalized their divorce last week after 15 months of marriage. And let me just say, if a 30-year old, sexually ambiguous, Ayn-Rand disciple and a 52-year old, twice-married, thrice engaged Hollywood leading man can’t make it, than what chance do the rest of us have?
Alas, their storybook romance flamed out faster than Depp’s last four films, turning ugly this spring when Heard filed for a temporary restraining order against the actor, alleging he had been both verbally and physically abusive to her throughout their marriage. Reports soon emerged that Heard was seeking $50,000 a month in alimony, but last week, the two reached a settlement that will have Depp making a one-time payment to Heard of $7 million.
That was not the most newsworthy part of the end of their pairing, however. Heard immediately released a statement explaining that she will contribute the entire $7 million to charity:
“As described in the restraining order and divorce settlement, money played no role for me personally and never has, except to the extent that I could donate it to charity and, in doing so, hopefully help those less able to defend themselves.”
To that end, the $7 million will be split between two charities: the American Civil Liberties Union — with the money earmarked to prevent violence against women — and the Children’s Hospital of Los Angeles, with Heard adding, “I know these organizations will put the funds to good use and look forward to continuing to support them in the future. Hopefully, this experience results in a positive change in the lives of people who need it the most.”
While Heard’s donation of her settlement payment is undeniably admirable, it may well yield an untenable tax situation.
Section 71 of the Internal Revenue Code provides that a taxpayer must include in income “amounts received as alimony or separate maintenance payments.” This is further defined as any payments made from one spouse to the other, in cash, pursuant to a divorce or separation agreement. Interestingly, payments made for child support are not included in the recipient’s taxable income, nor are they deductible on the tax return of the spouse making the payment. Because Heard and Depp had no children together (Depp has two from a previous marriage), however, that’s not a possibility in this situation.
OK, so Heard has to include $7 million in taxable income in 2016. What’s the big deal, she’ll just deduct the $7 million charitable contribution and wipe it all out, right? Wrong.
While donations to charity are indeed tax deductible, they are subject to various limitations depending on the nature of both the property being donated and the done organization. When cash is being contributed to so-called “public charities” — churches, schools, hospitals, governmental entities, private operating foundations, and other nonprofit agencies — the taxpayer may only deduct the contribution up to 50% of the taxpayer’s “adjusted gross income,” which is generally taxable income less a few specific and rarely available deductions.
As a result, while Heard will be required to recognize $7 million of taxable income resulting from the receipt of her alimony payment, her subsequent charitable contribution will result in a maximum deduction of only $3.5 million, leaving the actress with net taxable income of $3.5 million resulting from the two transfers.
It gets worse. A charitable contribution is claimed as an “itemized deduction.” As a method of extracting more tax dollars from the wealthiest 2% of taxpayers, after January 1, 2013, any taxpayer with adjusted gross income in excess of $250,000 (if single, $300,000 if married filing jointly) will lose 3% of most itemized deductions for every dollar adjusted gross income exceeds that threshold. As a result, Heard could lose another $200,000 of her charitable contribution to this “Pease limitation.”
There is some good news: Heard will be entitled to carry forward the unused $3.7 million charitable contribution deduction into the next five tax years. Unfortunately, in each succeeding year the carryforward will again be subject to the maximum 50% of adjusted gross income limitation.
That leaves Heard in a bit of a conundrum: $3.7 million of taxable income for a single taxpayer will result in a federal tax bill in the neighborhood of $1.4 million. The problem, of course, is that Heard just gave away all of her cash, which begs the question: how the heck is she going to pay her tax bill?
But wait, you may say, she’s a working actress, with roles in such illustrious works as Magic Mike XXL and Zombieland..surely she can pay a $1.4 million tax bill with the change under her couch cushions. Unfortunately, that’s not the reality according to Heard’s financial disclosures released as part of her request for alimony, which revealed that she earned only $260,000 in 2016 before agent’s commissions. So unless Heard was paid a king’s ransom for her turn in Pineapple Express, it’s unlikely she’s got the cash handy to satisfy a $1.4 million obligation to the IRS.
As further evidence that Heard may lack liquid assets, her career arc appears to be following the well-traveled path of “actor in desperate need of cash” (see Cage, Nicholas) by signing on for not one, but two super-hero films, with Heard set to appear in Justice League and Aquaman in the next two years.
Hey, you’ve gotta’ pay the bills somehow, and pretending to communicate with undersea animals seems a more palatable option than most.
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