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How to Help Avoid the Alimony Recapture Rule

The Alimony Tax Trap

The Alimony Recapture Rule, an infrequently-discussed tax trap, is an unpleasant surprise for some divorced individuals ordered to make alimony payments to their former spouse. In short, alimony recapture operates to force the alimony payer to report alimony payments they previously deducted to the IRS as income. For orders or agreements executed or entered before 2019, the paying spouse can deduct alimony payments on their taxes, while the receiving spouse must report it as income. When recapture occurs, however, this situation is reversed. Alimony recapture is enforced when the amount of alimony paid decreases substantially in the first three years following divorce. To learn more about the specifics of how alimony and child support is determined, please click here.

4 Things to Consider When Paying Alimony

So what can a person to do to avoid the tax nightmare that this federal tax rule can create? If you pay alimony, the following can be some important ideas to keep in mind and discuss with your attorney and tax professional.

  1. “Front loading” as a trigger to recapture. In this context, front loading refers to making large alimony payments in the year or years immediately following divorce. People do this sometimes when they feel like they have the money and/or their children are still minors and the parent wants to pay the support. The problem with front loading alimony payments is that if your alimony payments the second year after divorce are substantially less than what you paid in the first year, this will trigger recapture. Even if you do not trigger it the second year, but your payment the third year is $15,000 less than your second-year payments, you will be subject to alimony recapture.

  2. Using Section 71 payments as a workaround. Section 71 of the federal tax code allows the paying spouse to make so-called guaranteed alimony payments to the dependent spouse, the amount of which the two negotiate in settlement. They are in lieu of typical “maintenance” alimony payments ordered by the judge and are guaranteed because they cannot be modified in either amount or duration by the respective parties or the court. Section 71 payments are usually tax deductible for the paying spouse and included in the taxable income of the receiving spouse.

  3. Stating your variable uncontrolled income. If your income varies in amount for reasons beyond your control—whether it be because you are a contract worker, self-employed, a sales or other bonus driven industry or for some other reason—then it can be important to 1) clearly state this in the divorce decree, and 2) be prepared to provide the IRS with proof of this if they send an audit your way. In the divorce decree, consider stating what factors cause your income to vary, that you and your former spouse understand that your income varies and why, and that your ex will confirm both of these things to the IRS.

  4. Crafting an increasing alimony schedule. Depending on where you are in life, it can make sense anyway to set your monthly alimony payments to increase in amount over time (for example, as your former spouse approaches retirement age). Increasing your payments over time can likewise ensure that you do not fall prey to alimony recapture. However, it is important to keep in mind that linking an increase in alimony to a decrease in your child support obligation. The IRS can decide to classify the “alimony” payments as child support if the two amounts changed at the same time, which means you will have to report the “child support” as recaptured income.

If you don’t have a background in accounting or tax preparation you can see how all of these details can be overwhelming for those not in a related industry. Given the impact these decisions can make on your taxes and monthly financial obligations it is critical that you consult with competent professional help.

If you have an issue with alimony, alimony recapture or another family law matter such as separation, divorce or child custody, please contact one of the experienced and dedicated family law attorneys at Arnold & Smith, PLLC. We help our clients throughout Charlotte, North Carolina and the surrounding areas on a wide range of family law matters. Our attorneys are experienced in using mediation to help our clients reach agreeable compromise with their soon-to-be former spouses out of court when possible to save them the emotional and financial cost of battling it out in court; however, we are also known for our aggressive approach to litigation in defending our clients’ rights when negotiation is not a viable option. Contact Arnold & Smith, PLLC today or call us 24/7 at 704.370.2828 for an initial consultation with one of our family law attorneys.