Alimony recapture is a trap for the unwary. Years ago, it was designed to ensnare crafty taxpayers who tried to take advantage of the tax deduction by calling payments alimony when they were actually dividing marital property. Imagine the creative divorce settlements you could engineer if the tax deduction for alimony applied to marital property distribution. Under § 71(f) of the Tax Code, there is a formula to determine if alimony is “front-loaded.” If it is front-loaded, the tax deduction will be recaptured in the third post-separation calendar year.
To remember the alimony recapture rule, get in the habit of calling it “the three-year front-loading” rule. The recapture is triggered whenever there is a sharp reduction of alimony in the second or third post-separation calendar year. Family lawyers have to be careful when crafting a divorce settlement in which alimony is paid entirely or mostly in the first year or two after divorce. The payor can get an unpleasant surprise from the IRS – if the payments violate the alimony recapture rule.
In Chapter 3 of my book, Frumkes & Vertz on Divorce Taxation, we provide you with the formula for calculating alimony recapture. The first step is to compare how much alimony will be paid in Years 2 and 3. If alimony decreases by $15,000 or more, there might be an alimony recapture. Next, compare Year 1 to the average of the unrecaptured Year 2 alimony and Year 3. If Year 1 is greater than the adjusted average of Years 2 and 3, by $15,000 or more, there is alimony recapture. IRS Publication 504 contains a worksheet. Keep the formula handy and run it whenever you are negotiating alimony as part of a divorce settlement.
|Step 1||Calculate Recapture for Year 2|
|1. Alimony paid in year 2||$_________|
|2. Alimony paid in year 3 $_____ plus $15,000.00||__________|
|3. Subtract line 2 from line 1 (Not less than zero)||__________|
|Step 2||Calculate Recapture Base for Year 1|
|4. Alimony paid year 2||__________|
|5. Amount from line 3 above (Year 2 Recapture)||__________|
|6. Subtract line 5 from line 4 (Not less than zero)||__________|
|7. Alimony paid year 3||__________|
|8. Add lines 6 and 7||__________|
|9. Divide line 8 by 2||__________|
|10. Floor for recapture||$ 15,000.00|
|11. Add line 9 to line 10||__________|
|Step 3||Calculate Recapture for Year 1|
|12. Alimony paid year 1||__________|
|13. Amount from line 11 above||__________|
|14. Subtract line 13 from line 12 (Not less than zero)||__________|
|Step 4||Calculate Total Recapture|
|15. Amount from line 3||__________|
|16. Amount from line 14||__________|
|17. Add line 15 to line 16 RECAPTURE AMOUNT||__________|
- Alimony recapture generally does not apply to temporary support orders. See IRC § 71(f)(5)(b).
- The word “post-separation year” means that alimony recapture applies only to alimony that is ordered as part of a divorce instrument (meaning, a decree of divorce or legal separation, or marital settlement agreement).
Also, when comparing Years 1, 2 and 3, the tax law refers calendar years. The first post-separation calendar year is the first calendar year in which alimony is paid, not counting temporary support.
Alimony recapture is a tax disaster that can be avoided by good planning. If alimony is front-loaded in the first three years, the payor might get a tax bill in the third year, which materially changes the bargain that divorcing spouses have made. When you settle a divorce case, or go to trial, be sure not to fall into the trap of alimony recapture.
For family law help with alimony, call Brian C. Vertz. His knowledge and skill in tax and complex divorce matters can help to avoid alimony recapture problems. His law firm is a powerful team of lawyers dedicated to family law. In Pittsburgh and Western Pennsylvania, call Brian at 412-471-9000.