Are You Subject to the Alimony Recapture Rule?

by Gina Grady
alimony recapture rule

If being ordered to pay alimony was not already bad enough, imagine having made all your alimony payments on time, and then receiving a nasty letter from the IRS. It states that they are going to audit your tax returns for the last three years, including your paid alimony deductions. Sounds like a nightmare!

Just as your accountant instructed, you had deducted the alimony paid from your taxable income, and now find you owe taxes on it. Unfortunately, this is a reality for many people due to a little discussed and often misunderstood trap called the alimony recapture rule.

What is the Alimony Recapture Rule?

The idea behind the alimony recapture rule is to keep spouses from camouflaging property settlement payments as alimony. The IRS, or Internal Revenue Service, has reserved the right to “recapture” your income tax deductions if they determine that the payments you made were actually part of a property settlement or child support. This determination results in the alimony you deducted being included as taxable income in future years.

Some divorced spouses ordered to pay alimony do what is called “front-loading.” They pay the majority of the court-ordered alimony in the first few years after the divorce. While there may be a good reason to do this, such as paying for the ex-spouse’s education, so that he or she can become self-supporting, the IRS frowns on this action.

The recapture rule requires the spouse who is paying alimony to report all payments deducted. Recapture is only required if alimony payments cease entirely or decrease in the first three years following the divorce, and if one of the following statements apply:

  • Payments made during the third year are $15,000 (or more) less than the second year payments.
  • The average alimony paid during the second and third year is significantly less than the alimony paid during the first year.

If your situation meets those qualifications, you may be required to recapture the excess alimony paid during years one and two after your divorce, and report the excess alimony as taxable income. Unfortunately, no specific dollar amount is established for the “substantially less” rule. It is open to IRS interpretation.

Exceptions to the Rule

The IRS does make exceptions for circumstances beyond your control, such as the court  modifying alimony payments downward due to an unexpected financial crisis. The alimony recapture rule also does not apply if your ex-spouse dies or remarries.

Consult with an Attorney

Tax laws are continually changing. It is a good idea to talk to a tax professional and your attorney for the most up to date advice. The attorneys at the law office of Stearns-Montgomery and Proctor have the experience and knowledge to help you handle your alimony payments appropriately. They have several convenient locations in the Atlanta, Georgia area to meet your needs.