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Aug. 23 — Actress Amber Heard faces a new challenge now that her very public divorce has been settled: she must decide the best course of action to get the full tax deduction from her $7 million donation to charity.
Heard, recognizable for appearances in films including the 2009 horror-comedy “Zombieland,” and Hollywood veteran Johnny Depp reached a divorce settlement last week after three months of negotiations and 15 months of marriage, several media outlets reported Aug. 16. Heard, who previously alleged Depp struck her with a mobile phone, also dropped a domestic restraining order filed in May against the Oscar nominee.
As part of the agreement, Depp agreed to pay Heard $7 million, which the actress plans to donate to charity, according to a recent statement.
“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,” Heard said. “As reported in the media, the amount received in the divorce was $7 million and $7 million is being donated,” she said.
The actress said the donation will be divided equally between two public charities—the American Civil Liberties Union and Children's Hospital of Los Angeles.
Practitioners told Bloomberg BNA that Heard could face tax implications based on the way Depp's payment was structured: either encountering a significant tax bill or losing out on the maximum charitable deduction from the $7 million donation.
They said the actress might want to consider negotiating advance payments from upcoming films in order to improve her position.
Though Heard disclosed the sum of the agreed-upon payment, she didn't comment on the nature of the amount. It is unclear whether the payment was entirely made in cash or whether the sum was structured as alimony or a property settlement.
Assuming the payment was a one-time cash payment, when cash is donated to a public charity, a person can deduct 50 percent of his or her annual adjusted gross income, and that deduction can be applied for up to five years after the donation. In court documents filed in May, Heard claimed her gross income in 2015—before expenses—was $260,000.
If Depp's payment was structured as alimony, the $7 million would be treated as taxable income to Heard pursuant to tax code Section 71. Even after deducting 50 percent, Heard would be liable to pay taxes on more than $3.5 million. And because she is donating the full $7 million, it's possible she wouldn't have enough cash to pay her tax bill.
Edward Beckwith, a partner at Baker and Hostetler LLP, said it is improbable that the payment was structured as alimony, because alimony would normally be distributed in several payments. It is also unlikely because one would assume that Heard's attorney would have understood the tax ramifications, he said.
The more likely scenario is that the agreed sum was a property settlement, Beckwith said.
California is a community property state, meaning property acquired during a marriage is owned jointly by both spouses and divided upon divorce. Additionally, under Section 1041, a transfer of property from one spouse to another within one year of a divorce will be tax-free to the recipient.
If the transfer was tax-free, Beckwith said, the question then becomes this: Based on Heard's projected earning potential, will she be able to reap the full tax benefit of her $7 million donation?
To maximize her deductions “over six years, she would need to make $14 million of adjusted gross income,” he said. “That means over the next five years, she better get busy.”
According to the Internet Movie Database (IMDb), the actress has four movies in various stages of production from 2016 to 2018, including “Justice League” and “Aquaman.”
The chance to maximize her charitable deduction “will create a significant incentive for her to increase her income over the ensuing five years because she will be able to earn half of it tax free,” Beckwith said. She may consider asking producers for advancements in her salary to take advantage of the deduction, he said.
Emil Kallina, an attorney with Kallina and Associates LLC, said another possibility is that the payment from Depp is a combination of community property and alimony.
Under those circumstances, Heard would still benefit from accelerating payments from her films to take advantage of the charitable deduction, while also obtaining enough cash to pay her taxes, he said.
Kallina said he would have approached Heard's donation strategy from a different angle.
“If I had done something like this I would have looked at some other options,” he said. “They have charitable vehicles like charitable remainder trusts, gift annuities and pooled income funds that may have been a good way to achieve what she wanted to achieve and avoid some of the tax implications.”
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