Not a Lexis+ subscriber? Try it out for free.

Lexis® Hub

Recapture of Excess Front-Loaded Alimony Payments

Under Internal Revenue Code (IRC) § 71, recapture requirements apply if excess alimony payments are front-loaded into the first three post-separation years. Their purpose is to discourage divorcing spouses from improperly characterizing property settlement payments as alimony. In this context, "recapture" means to give back or to adjust for a tax benefit that was improperly taken at an earlier point in time. The spouse paying alimony is allowed to claim those payments as tax deduction, while amounts paid as a part of a property settlement are not deductible.
 
Recapture Computations
 
Only the first three post-separation years are relevant under the recapture provisions of the tax laws. A dramatic reduction or elimination of alimony payments after the third post-separation year will not trigger recapture. Although the statutory language relating to the computations is verbose, a simple and straightforward "Recapture of Alimony" worksheet for performing the necessary computations is provided in Internal Revenue Service publication 504:
 

Worksheet 1. Recapture of Alimony

 
Note.Do not enter less than -0- on any line.
1. Alimony paid in 2nd year 1.      
2. Alimony paid in 3rd year 2.          
3. Floor 3. $15,000        
4. Add lines 2 and 3 4.      
5. Subtract line 4 from line 1 5.  
6. Alimony paid in 1st year 6.      
7. Adjusted alimony paid in 2nd year
(line 1 less line 5)
7.          
8. Alimony paid in 3rd year 8.          
9. Add lines 7 and 8 9.          
10. Divide line 9 by 2 10.          
11. Floor 11. $15,000        
12. Add lines 10 and 11 12.      
13. Subtract line 12 from line 6 13.  
14. Recaptured alimony. Add lines 5 and 13 *14.  
* If you deducted alimony paid, report this amount as income on Form 1040, line 11.
If you reported alimony received, deduct this amount on Form 1040, line 31a.
   
 
As the worksheet indicates, whether recapture is required is determined by looking at the amount of alimony or separate maintenance payments made in the first three post-separation years. Two computations must be made to determine if recapture is necessary:
 
  • A taxpayer is subject to recapture in the third post-separation year if the alimony paid in that year decreases by more than $15,000 from the second post-separation year. The excess over $15,000 must be recaptured.
  • A taxpayer is also subject to recapture in the third year if the payments made in the first post-separation year exceed the average of the payments in the second and third post-separation years by more than $15,000. Again, the excess over $15,000 is recaptured.
 
If both of these computations result in recapture, the amount recaptured under the first computation is subtracted from the second year payments for purposes of making the second computation.
 
Example of First Computation: H pays alimony to W in the first post-separation and second post-separation years of $42,000. In the third post-separation year, H pays W alimony of $20,000. In the third post-separation year, H must recapture $7,000 in the third post-separation year, the amount by which the excess of the second post-separation year payments over the third separation year payments ($42,000 - $20,000 = $22,000) exceeds the $15,000 statutory floor ($22,000 - $15,000 = $7,000). W has a corresponding $7,000 deduction.
 
Example of Second Computation: H pays $42,000 alimony to W in the first post-separation year. In the second post-separation year, H pays $12,000 in alimony, and in the third post-separation year, H pays $8,000 in alimony. The average alimony for the second and third post-separation years is $10,000 [($12,000 + $8,000)/2]. The alimony paid in the first post-separation year exceeds this amount by $32,000 ($42,000 - $10,000). The excess of this amount over the $15,000 statutory floor is $17,000 ($32,000 less $15,000). H must recapture this amount as gross income in the third post-separation year. W has a corresponding $17,000 deduction.
 
Example of Third Computation: H pays $60,000 alimony to W in the first post-separation year. In the second post-separation year, H pays $24,000 in alimony, and in the third post-separation year, H pays $6,000 in alimony. Both recapture rules are applicable. The amount paid in the first post-separation year exceeds the average of amounts paid in the second and third post-separation years by more than $15,000; the alimony paid in the second post-separation year also exceeds the amount paid in the third post-separation year by more than $15,000. The amount of recapture is computed as follows:
 
Under the first computation, H must recapture $3,000, the amount by which the excess of the second post-separation year payments over the third separation year payments ($24,000 - $6,000 = $18,000) exceeds the $15,000 statutory floor ($18,000 - $15,000 = $3,000). Then, the second computation is made, but in doing so, $3,000 is subtracted from the alimony payments of the second post-separation year. So, from $60,000 is subtracted the sum of the average of the adjusted second post-separation year payment and the first post-separation year payment or $13,500 [($21,000 + $6,000)/2 = $13,500] plus the $15,000 statutory floor. The amount recaptured in the second computation is $31,500 ($60,000 - $28,500). The total amount of recapture from both computations is $34,500 ($3,000 + $31,500).
 
If the computations result in excess alimony payments, the payor spouse must include the excess in gross income in the third post-separation year, and the payee spouse is allowed an above-the-line deduction equal to the amount of the excess in the third post-separation year.
 
Determining Post-Separation Years
 
Understanding the term "post-separation years" is critical in order to apply the recapture rules properly:
 
  • The first post-separation year is the first calendar year in which the payor spouse pays alimony or separate maintenance payments to the payee spouse
  • The second and third post-separation years are the next two succeeding calendar years
  • Any time in which payments were being made under temporary support orders is not taken into account
 
The timing of the first non-temporary payment that qualifies as alimony or separate maintenance under IRC § 71 determines the first post-separation year. This is not necessarily the year the spouses physically separated or even the year in which a final decree of divorce is entered. It may also not be the year payments are first made, if those payments do not qualify as alimony or separate maintenance payments.
 
Example: A divorce decree is entered in October of Year One and it calls for H to pay to W monthly alimony payments beginning in October of Year One. However, H and W occupy the same household until February of Year Two. Their cohabitation prevents the payments from being treated as deductible alimony, and so Year One cannot be the first post-separation year. So, assuming other statutory requirements are met, Year Two would be the first post-separation year.
 
Exceptions to Recapture
 
Recapture of alimony does not apply in several situations:
 
  • It does not apply to a reduction occurring by reason of the death of either spouse or the remarriage of the payee spouse before the close of the third post-separation year.
  • Any support payments made under any decree described in IRC <§ 71>(b)(2)(C) are not taken into account in applying the recapture provisions, and so a variation in those payments will not trigger recapture. Tip: Under this exception, you can front-load without having to recapture. If the payor and payee stipulate to a temporary support decree, recapture will not apply even though the recapture calculations show an excess front-loading of alimony payments.
  • The alimony recapture rules do not apply to certain payments that vary and that are not within the control of the payor spouse. For this exception to apply, the liability to make the payments must continue over a period of at least three years.
 
Example: H is a writer whose income is uncertain. H and W agree that H will pay W as alimony 40% of his income from writing for ten years after their divorce, the payments to cease on W's death. In the first post-separation year, H pays W $100,000 but due to a decrease in his income, he pays only $25,000 in the second and third post-separation years. There is no recapture.
 
Example: H agrees to pay W as alimony 50% of his income as an independent computer consultant for the first $100,000 of income in any year, and 30% of the excess over $100,000 in any year. The amount paid in any year is subject to a ceiling of $70,000. The obligations are to continue for five years after their divorce, but will terminate on W's death. In the first post-separation year, H pays W $70,000 but due to a decrease in his income, he pays only $50,000 in the second post-separation year and $45,000 in the third post-separation year. Because the statute explicitly permits a formula based on a fixed "portion or portions of income," there is no recapture.