WHEN ALIMONY PAYMENTS decrease substantially or end during the first three calendar years, the so-called alimony recapture rule can come into play. The three-year period starts with the first calendar year that alimony payments are made under a decree of divorce or separate maintenance or a written separation agreement.
You don’t have to worry about the recapture rule if there will be less than a $15,000 difference between payments in the first year and payments in each of the following two years. For example, payments of $50,000 in Year 1, $35,000 in Year 2 and $35,000 in Year 3 are OK. And $15,000 in Year 1 followed by zero and zero is OK.
You are also OK if the Year 3 payment is within $15,000 of the Year 2 payment and the average of the payments for Years 2 and 3 is within $15,000 of the Year 1 payment. For example, payments of $42,500 in Year 1, $35,000 in Year 2 and $20,000 in Year 3 are OK. But payments of $50,000, $35,000 and $20,000 would result in $7,500 of alimony recapture.
The bottom line: Don’t try to figure this out for yourself. Let the calculator at SmartMoney.com do the number crunching.
What happens when a recapture occurs? At least part of the tax break is transferred from the alimony payer to the alimony recipient in the third year. Here’s how it works.
In the third year, the person making the payments must report the recapture amount as taxable income. In effect, part of the payer’s deductions for the first two years are unwound or "recaptured" as they say in tax lingo.
In the same year, the person receiving the payments is entitled to a deduction for the recapture amount. In effect, part of the recipient’s taxable alimony income from the first two years is negated by the Year 3 write-off.
When calculating alimony recapture, the following payments are not included. So, don’t enter them into the calculator.