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The Divorce Encyclopedia

Term Definition Recapture - refers to the IRSís ability to capture taxes on income distributed as part of a divorce agreement.
Application in Divorce The term recapture refers to the ability of the IRS to recover the tax benefit of deduction or a credit taken by a taxpayer. Recapture means the IRS disallows the deduction or credit. The purpose of recapture is to prevent a divorcing couple from dividing their property and calling the distribution alimony. Recapture applies to alimony payments when the alimony paid decreases by more than $15,000 annually within a three-year period after a divorce. Alimony is tax deductible to the payor and taxable to the payee, but if in a three-year period a taxpayer’s alimony decreases by more than $15,000 from the amount of the proceeding year, the IRS regards the alimony payments as property distribution and recaptures the obligator’s income retroactively. At the same time, the formerly labeled alimony payments are deemed tax-free property distributions to the recipient. The recapture usually causes a substantial income tax refund to the recipient, who can file an amended return, and an equally substantial retroactive tax bill to the payor.

For example, when Rufus and Rhonda went separate ways, he paid her $60,000 in alimony the first year and $30,000 in the second and then $1,000 in the third year. Between the first and second years, Rufus’s alimony payments dropped $30,000, and between the second and third, $29,000. In other words, the alimony dropped more than $15,000 annually. The result is bad news for Rufus; he must recapture some $50,000 and pay them back to the I.R.S.

The I.R.S. rules describing recapture are complicated and the domain of a tax accountant.

Some divorcing couples use declining maintenance to ease the transition from being married to being single again. An alimony schedule redacting this decline support can be constructed to give both former spouses the maximum benefit and at the same time avoid the risk of recapture.

The perils of recapture can be avoided by consulting a certified divorce planner (CDF).

See Alimony.

See also Certified Divorce Planner (CDF).

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