Recapture of Excess Front-Loaded Alimony Payment
If you pay alimony (also known as spousal support) to your ex-spouse, it’s critical that you understand the alimony recapture rule or else you risk needlessly losing money, paying out extra money in taxes, and missing out on the benefits you’re otherwise entitled to under your divorce decree.
Background of the Recapture Rule
Under federal tax law, the paying spouse may deduct alimony payments made each year. Over the years, IRS officials became concerned about the intersection between divorce law and tax law, noticing that some people who pay alimony were abusing the deduction. Specifically, the IRS noticed that some people who paid alimony were improperly claiming the alimony deduction when in truth, their “alimony” payments were really part of the overall divorce settlement and should have been a tax free event, referred to as a 1031 exchange of property between spouses.
To combat this problem, the IRS enacted the alimony recapture rule, which sets up a formula that ensures money claimed as alimony isn’t wrongfully deducted on federal tax returns. The end result is that anyone who's paying alimony and who took an improper deduction "recaptures" that money and returns it to the government.
Alimony Recapture Rule Defined
Some divorcing spouses try to “front-load” alimony payments in the first several years after the divorce, meaning that they pay out the majority of alimony in the beginning. There may be good reason for wanting to do this—for example, some couples may want the spouse who receives alimony to be able to attend school in the years immediately following the divorce, so that this spouse can get an education and become self-supporting sooner. But the IRS frowns on front-loading.
The alimony recapture rule requires the paying spouse to report all payments previously deducted. Recapture is required if alimony payments decrease or cease altogether in the first three years after the divorce, and if either of the following statements are also true:
- Total alimony payments made in the third year are more than $15,000 less than the second year, or
- The average alimony paid in the second and third year “decreases significantly” from the alimony paid in the first year.
If your situation meets the above definition, then the person who pays alimony is required to “recapture” excess alimony paid in the first and second years after the divorce, and to report the excess amount as taxable income.
If you only paid alimony for a short period of time as part of a temporary order before your divorce was finalized, you don’t have to worry about the recapture rule. The rule’s three-year period takes effect in the first calendar year that you make an alimony payment under the final divorce decree.
If the spouse receiving alimony remarries, or if either spouse dies, the recapture rule doesn’t apply.
A Final Word
You may wish to read the IRS web page on alimony, which discusses the recapture rule. Many private law firms also have online alimony recapture calculators that you can use to determine whether the rule will apply in your circumstances.
The alimony recapture rule is complicated. If you pay alimony, you should contact an experienced family law attorney and a certified public accountant to make sure you understand all the tax implications of your divorce.