Alimony and the Recapture Rule

“The term alimony usually and technically means an allowance for spousal support and is distinguishable from property division and child support.” In Re Marriage of Sjulin, 431 NW2d 773 (Iowa 1988). Essentially, in situations where alimony is applicable, the higher earner pays spousal support to the lower earner “based primarily upon a continuing duty to support . . . .” Dubicki v. Dubicki, 186 Conn. 709, 714, footnote 2, 443 A.2d 1268 (1982). The award of alimony is governed by Connecticut General Statutes § 46b-82.

What are the Tax Implications of Alimony?

“Alimony or separate maintenance payments are, under section 71, included in the gross income of the payee spouse, and, under section 215, allowed as a deduction from the gross income of the payor spouse.” 26 CFR Chap. 1, §1.71-1T (2012). Meaning that generally, alimony payments are taken as a tax deduction by the payor spouse and part of the gross income for the spouse
receiving the alimony payments; this means that the spouse paying alimony gets a tax break from paying his or her alimony support obligation.

What is the Recapture Rule?

The Recapture Rule is a safeguard implemented by the Internal Revenue Service and should be considered when drafting your alimony obligation in your Marital Settlement Agreement.

Specifically, the year that you first make a qualifying alimony support payment under a decree of divorce or separate maintenance or a written separation agreement, begins the timing of a three year period of review. You do not include any temporary or pendente lite support orders in the calculation of this three year period.

If during those three years your alimony “payments decrease or end … you may be subject to the recapture rule. If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. Your spouse can deduct in the third year part of the alimony payments he or she  previously included in income.

The reasons for a reduction or end of alimony payments that can require a recapture include:

• A change in your divorce or separation instrument,
• A failure to make timely payments,
• A reduction in your ability to provide support, or
• A reduction in your spouse’s support needs.”United States Internal Revenue Service,
  Publication 17, Your Federal Income Tax,
  Part 4,Adjustments to Income, Chapter
  18,Alimony(2012).Available at:<http://www.irs.gov/publications/p17/ch18.html#en_US_2012_publink1000172912>

What is the Purpose of the Recapture Rule?

This rule is intended to prevent the person making alimony payments whose divorce occurred near the end of the calendar year from making deductible property settlements at the beginning of the calendar year. The IRS had noticed that some people had been disguising property settlements, which are non-deductible as alimony payments which are deductible. The Recapture Rule’s purpose is to prevent the obtainment of a beneficial tax break from payments that are not truly alimony support payments.

When does the Recapture Rule Apply?

One is “subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year.

When you [calculate] a decrease in alimony, do not include the following amounts.

• Payments made under a temporary support order.
• Payments required over a period of at least 3 calendar
  years that vary because they are a fixed part of your income from a business or
  property, or from compensation for employment or self-employment.
• Payments that decrease because of the death of either
  spouse or the remarriage of the spouse receiving the payments before the end of
  the third year.” Id.

In order to calculate the recapture, you can use Worksheet 1 in the IRS Publication 504.

For more information on Alimony support and the Recapture Rule you can visit www.irs.gov, or contact the Attorneys at Mariani Reck Lane LLC, LLC.

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This information is intended to provide general information
only and is not intended and should not be relied on as legal advice. You are
encouraged to consult with appropriate legal counsel.