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The Alimony Recapture Rule
A divorce can have many tax consequences for both parties involved. The spouse that feels the financial burden of the divorce is the highest earning party. In the event that the earning spouse is ordered to pay alimony to the other spouse, there will be tax implications for both parties. The alimony recipient must include the alimony payments as income on her tax return. On the flip side, the spouse paying the alimony is allowed to deduct the alimony from income on his tax return. If this were the end of the matter, the treatment of alimony would not be difficult to understand.
But the tax laws are never that simple. The IRS was concerned with the paying spouse front-loading alimony payments during the first 3 years after divorce.
The alimony recapture rule places a cap on alimony payments in the first 3 years. The alimony recapture rule comes into play if the alimony payments made in year 3 decrease by $15,000 or more from payments made in year 2, or if payments made in year 2 and year 3 or significantly less than payments in year 1. Essentially, the IRS logic behind this rule is that taxpayers will not be allowed to “game the system” by taking advantage of extensive alimony deductions shortly after a divorce.
The recapture rule is complex and confusing, but essentially works like this: Husband pays wife a total of $50,000 in post separation year 1 and year 2. In year 3, husband pays wife $10,000. For year 3, the husband must recapture $25,000, which is the amount that year 2 and year 3 payments ($50,000 – $10,000 = $40,000) exceeds the statutory floor of $15,000. The wife, by comparison, can deduct $25,000 from her income.
There are a few exceptions to the recapture rule. Payments made in accordance with a temporary order are not subject to the rule. In the event of either spouse’s death or the alimony recipient remarrying within 3 years after the divorce, reduction in payments does not trigger the rule.
To help ease the burden of the recapture rule, it is important to talk to an experienced divorce lawyer who can help you through such a difficult time. Contact Attorney Ronald Kossack in Phoenix, Arizona for information and legal assistance.