793 / What are the recapture rules that apply with respect to alimony payments made during the first three years of divorce?

Editor’s Note: The 2017 Tax Act eliminated the deduction for alimony for tax years beginning after 2018, and provides that alimony and separate maintenance payments are no longer included in the income of the recipient. This provision is effective after December 31, 2018, but also applies to divorce or separation agreements executed before that date that are subsequently modified and specify that the new provision will apply. The discussion below continues to apply for tax years beginning prior to 2019.

Recapture. For tax years beginning prior to January 1, 2019, alimony recapture rules generally require recapture in the third post-separation year of “excess” payments (i.e., disproportionately large payments made in either the first or second years – or both – that are deemed to represent nondeductible property settlements previously deducted as alimony). The first post-separation year is the first calendar year in which alimony or separate maintenance payments are made; the second and third years are the next two calendar years thereafter.

The amount recaptured is included in the income of the payor spouse and deducted
from the gross income of the recipient. The amount recaptured is determined by first comparing the alimony payments made for the second and third post-separation years. If payments during the second year exceed the payments during the third year by more than $15,000, the excess is “recaptured.” Next, the payments during the first year are compared with the average of the payments made during the second year (as reduced by any recaptured excess) and the payments made during the third year. If the payments made during the first year exceed the average of the amounts paid during the second (as reduced) and third years by more than $15,000, the excess is also recaptured.¹

There are limited exceptions to the recapture rule: if payments cease because of the marriage of the recipient or the death of either spouse before the close of the third separation year, or to the extent payments required over at least a three-year period are tied to a fixed portion of income from a business or property or compensation, the payments will not come within these rules. Furthermore, payments under temporary support orders do not come within the recapture rules.²

Payments made under instruments executed before 1985 are taxed under different rules (i.e., IRC Section 71 prior to TRA ’84, unless the instrument is modified after 1984). Depending on the date of modification after 1984, either the TRA ’84 rules or a three year recapture period will apply, or the recapture rules for instruments executed after 1986 (described above) will apply.

When a payor spouse claims alimony payments as a deduction, he is required to furnish the recipient spouse’s Social Security number on his tax return for each taxable year the payments are made.³ Alimony paid by a U.S. citizen spouse to a foreign spouse is deductible by the payor spouse even though the recipient is not taxable on the income under a treaty; however, the penalty for failing to include the recipient’s Taxpayer Identification Number (TIN) on the payor’s tax return may still apply.⁴