Alimony recapture is a rule that the IRS applies when alimony payments gradually decrease during the first three years immediately post divorce by way of the Property Settlement Agreement.
The IRS was noticing that people sometimes disguised property settlement payments (non deductible) as alimony (deductible) to obtain the beneficial tax break.
Alimony Recapture Formula
How does it work? Well, first, the IRS has a complex formula to determine if the gradual reduction over three years is enough to trigger the recapture rules. Second, if the recapture is triggered, it works for both the payor and receivor. The payor is disallowed the previous attempts over the past two years of characterizing the payments as alimony (deducting it from their income). The receivor then gets a credit and a reduction of income during those past two years, because alimony is considered income.
These rules exclude pendente lite (temporary) alimony and exclude deductions in alimony due to death or remarriage.
Also, it’s a dollar for dollar recapture. Meaning if the “recapture amount” is determined to be $10k, the payor will be penalized with $10,000 extra income over of the course of the previous two years and the receivor will be credited with $10,000 less income over the course of the past two years. In other words, it’s equal.
Here is a simple example: $100,000 alimony paid in first year post divorce, $12,000 alimony paid in second year post divorce and $6,000 alimony paid in third year post divorce, the IRS “recapture amount” comes to $16,000. If you decrease only the alimony paid in first year post divorce from $100,000 to $24,000, no alimony recapture is triggered.
Please consult your tax advisor for specifics on this issue, and make sure your family law attorney is aware of this tax consequence as well.