Alimony Recapture Rule

Disclaimer: The information below was written before the Tax Cuts and Jobs Act was passed in December 2017. The 2017 Tax Cuts and Jobs Act states that the payment of alimony cannot be treated as a deduction from the paying spouse's income for tax purposes. Similarly, receiving alimony payments does not have to be reported as income for the receiving spouse for tax purposes. Accordingly the 2017 Tax Cuts and Jobs Act has made the alimony recapture rule unnecessary and no longer applicable.

What is the Alimony Recapture Rule?

If alimony is an issue is a client's case, attorneys advise that alimony may generally be deducted by the obligated spouse and must be included as income to the recipient spouse for income tax purposes. However, one very important exception to this alimony rule is often overlooked, the alimony recapture rule.

Similar to the IRS rule concerning the deductibility of alimony payments, the recapture rule is also a rule promulgated by the IRS. Specifically, this rule states:

Recapture Rule

If your alimony payments decrease or terminate during the first 3 calendar years, you may be subject to the recapture rule. If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. Your spouse can deduct in the third year part of the alimony payments he or she previously included in income.

The 3-year period starts with the first calendar year you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a written separation agreement. Do not include any time in which payments were being made under temporary support orders. The second and third years are the next 2 calendar years, whether or not payments are made during those years.

The reasons for a reduction or termination of alimony payments that can require a recapture include:

• A change in your divorce or separation instrument,
• A failure to make timely payments,
• A reduction in your ability to provide support, or
• A reduction in your spouse's support needs.

When you figure a decrease in alimony, do not include the following amounts.

• Payments made under a temporary support order.
• Payments required over a period of at least 3 calendar years that vary because they are a fixed part of your income from a business or property, or from compensation for employment or self-employment.
• Payments that decrease because of the death of either spouse or the remarriage of the spouse receiving the payments before the end of the third year.

See IRS Publication 504 and IRS Publication 17, Chapter 18.

In essence, if you are currently paying alimony and your alimony payments decrease or end during the first three calendar years of payment, you may be subject to the recapture rule. If you are in that third year, you will have to include as income part of the alimony payments that you have previously deducted in prior years. Similarly, your former spouse can deduct a portion of those alimony payments that were previously included as income in that third year.

For example, if in the first year you pay $40,000 in alimony, then in the second year you pay $30,000 in alimony, but in the third year you successfully motion to modify your obligation because your ex has a new job and, as a result, you only pay $14,000 in alimony ($16,000 less than you paid in the second year), you have triggered the recapture rule. If the decrease in your alimony payments does trigger the recapture rule and the recaptured amount is determined, you will be penalized with extra income equaling the recapture amount and your former spouse will be credited with less income equaling the recapture amount. For example, if the recapture amount in your case is determined to be $15,000, you will be penalized with $15,000 extra income over the course of the previous two years and your former spouse will be credited with $15,000 less income over the course of the past two years.

Thus, if you are considering paying or receiving alimony as part of a divorce and think you may fall within this exception, we strongly urge you to consult your tax or financial advisor for specifics on this issue.