What is Alimony Recapture?
Wealthhow.com defines Alimony Recapture as “chiefly a situation or a probability that the payment of alimony has been reduced from the required amount or have stopped or terminated in the first 3 consecutive calendar years.”
What does this mean?
Alimony Recapture is an effort by the IRS to block the disguise of a property settlement in divorce as tax deductible alimony.
Internal Revenue Code requires recapture of deductions taken for alimony payments into the income of the payer spouse if alimony decreases too fast in the first three calendar years of permanent support. The amount to be recaptured is determined by recomputation of the payer’s tax-deductible payments.
- Recomputation occurs once in the third post separation year.
- The recaptured amount is includable in the income of the payer spouse in the third post separation year and the same amount is an above the line deduction to the recipient spouse in the same year.
- The amount that must be recaptured in the third post-separation year is the sum of the excess payments made in the first post-separation year plus the excess payments made in the second post-separation year.
Exceptions
Alimony Recapture DOES NOT APPLY where:
- The payments fluctuate outside of the payer’s control because of a continuing liability to pay a fixed percentage of income from the earnings of a business or property or from compensation from employment or self-employment.
- The alimony payments terminate due to death of either party or remarriage of the recipient before the end of the third post-separation year
- Payments are pursuant to a temporary order.
If alimony or separate maintenance payments decline or cease during a post-separation year for any reason other than one contemplated by these exceptions (including a failure by the payer to make timely payments, a modification of the divorce or separation instrument, a reduction in the support needs of the payee, or a reduction in the ability of the payer to provide support), excess amounts will be subject to recapture.
AS A GENERAL RULE OF THUMB, FRONT-LOADING CAN BE AVOIDED IF, WITHIN THE FIRST THREE CALENDAR YEARS AFTER THE DIVORCE, THERE IS NO MORE THAN A $15,000 VARIATION IN ALIMONY FROM YEAR TO YEAR.
Sound complicated? It is. Get an expert to help you avoid costly errors and don’t assume your attorney is looking out for this kind of financial blunder.
This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.
Lou Falvo is a Certified Divorce Financial Analyst® and CIMA® (Certified Investment Management Analyst) who assists clients by evaluating the tax and financial aspects of divorce. Lou is dedicated to reducing the burden of each client by thoroughly examining the financial elements of the client’s divorce, with a keen focus on what is in his or her best interests. Contact Lou to find out how he can assist you with your divorce proceedings at lfalvo@crossroadsdivorce.com or (585) 542-2382.