Although child support is not deductible by a payee, alimony is generally deductible by the payer and must be included as income to the payee. While many attorneys provide this advice to their clients, there is one often overlooked exception to this alimony rule that should be carefully examined during a divorce case. In particular, if alimony payments decrease or terminate during the first three calendar years, you may accidentally find yourself subject to the alimony recapture rule. If you are subject to this rule, you will have to include as income in the third year part of the alimony payments that you have previously deducted (and your former spouse can similarly deduct in the third year part of the alimony payments that were previously included as income). As pointed out by IRS publication 504:
"You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year."
If you are considering paying/receiving alimony as part of a divorce and think you may fall within this exception, we strongly urge you to seek the advice of a tax professional you trust to provide you guidance in this complex area.
For more information we recommend you start by reading IRS Publication 504 and consult with a tax professional.