Alimony and Taxes and Recapture

There are many tax aspects that come into play when alimony is involved in a divorce. Alimony can create problems under what are called IRS recapture rules, so a divorcing couple must remember alimony recapture.

Recapture applies to alimony payments when the amount paid decreases by more than $15,000 annually within a three-year period after a divorce. If in a three-year period, a taxpayer’s alimony decreases by more than $15,000 from the amount of the preceding year, the IRS considers the payments as property distribution and recaptures the obligor’s income retroactively. Thus, the IRS recovers the tax benefit of a deduction or a credit taken by a taxpayer and disallows the deduction.

Recapture prevents a divorcing couple from dividing their property and calling the distribution alimony. Recapture can become complicated, and anyone who thinks he or she may have a problem as either a payor or a recipient of alimony should consult a tax accountant.

IRS Publication 504 provides guidance about the recapture of alimony. If alimony payments decrease or terminate during the first three calendar years, the payor may be subject to the recapture rule and have to include income in the third year part of the alimony payments previously deducted. The recipient can deduct in the third year part of the alimony payments he or she previously included in income. The three-year period starts with the first calendar year of making an alimony payment, and the second and third years are the next two 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 terms and conditions of the divorce, a failure to make timely payments, a reduction in the payor’s ability to provide support, or a reduction in the former spouse’s support needs.

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