Front Loading of Alimony – Beware of the Recapture Rule

If you are the Payee (the spouse receiving the payments) congratulations you must have great negotiation skills; however, this article is not for you. As the payor of alimony (the spouse paying), how would you feel if after a few years the IRS told you that you could not deduct the alimony payments that you paid to your ex-spouse? You must be thinking that this could not happen to me…my agreement stated that I could deduct the payments and my ex-spouse would have to include them as income. Well, if your alimony payments decrease or end during the first three calendar years, you may be subject to the recapture rule.

The rule comes into effect to the extent that alimony payments decrease annually in excess of $15,000 during the first three calendar years. To the extent that the payor spouse has paid excess alimony, the excess alimony is to be recaptured in the payor spouse’s taxable income beginning in the third year after divorce. The payee spouse is entitled to deduct the recaptured amount from gross income in the third year after divorce.

An example: Both spouses decide that it would be in the best interest of their family if one spouse were able to go back to school for two years after the divorce. After two years they plan on both spouses being able to work and support would no longer be needed. They decided that one spouse would pay $24,000 each year (or $2,000 per month) in alimony for two years.

A friend tells them about the IRS rule that says if you want to deduct everything over $15,000, alimony must go on for at least three years, but the rule doesn’t stipulate as to the amount that must be paid. So for year three, they decide that there will be a $1,000 payment to satisfy the IRS rule. This is what the figures look like.

1st Year $24,000

2nd Year $24,000

3rd Year $1,000

The couple in the above example would still fall into the recapture rule because of the second part of the rule. If payments drop by more than $15,000 from one year to the next, there is tax recapture on the amount over $15,000.

There are ways to plan around the recapture rule as well as the three-year requirement. The first step is to get a financial expert that specializes in the field of divorce involved with your case.

Damon Wykrent, CFP®, CDFATM, CFE has over a decade of extensive experience which includes work in the financial services industry and being a financial expert in a full service law firm. On a daily basis, Damon provides expert financial support to attorneys and individuals going through the divorce process. Some of these areas include explaining business valuations, present value calculations for pensions and other assets, asset tracing, measuring economic damages, uncontested and contested property division, mediation and settlement support, QDRO support, expert witness testimony, and work as a neutral financial expert as part of a collaborative team. For more information about Damon go to:www.DivorceFinancialExpert.com.

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