The recapture rule forces the alimony payer to report as income the alimony payments they previously deducted, which means the ex-spouse is entitled to reduce from income the alimony payments they previously received.
The rule applies when the payments decrease or terminate during the first three calendars years post-divorce and:
1.) The total payments made in the third year decrease by $15,000 or more from the payments made in the second year; or
2.) The payments made in the second year and the third year are substantially less than the payments made in the first year.
Reasons other than the language of your divorce decree can cause the reduction, even reasons beyond your control, like a modification of the decree, failure to make timely payments, inability to make payments, and a modification in the amount you pay because your ex no longer needs as much from you.
For example, if in the first year you pay $30,000 in alimony, then in the second year you pay $20,000 in alimony, but in the third year you successfully motion to modify your obligation because your ex has a new job and, as a result, you only pay $4,000 in alimony ($16,000 less than the second year), you’ve triggered the recapture rule.
Be prepared to report the first year’s worth and the second year’s worth of formerly deducted alimony payments as income. And you thought you were doing yourself a huge benefit by petitioning to modify the alimony obligation in the third year.
Recapture Rule Exceptions
However, the recapture rule does not apply:
1.) For payments made pursuant to a temporary order;
2.) If the payments terminate due to you or your ex’s death;
3.) Your ex’s remarriage prior to the end of the third year; and
4.) When the total payments made each year vary, for reasons not in your control, and are tied to a business, property, variable employment or self-employment. In these circumstances, the termination and variable amounts of alimony are foreseeable and assumed.
For example, if you agree in your divorce decree to pay 10% of your income received for your alternative energy business – a business that is in a state of flux – then you would not necessarily have to recapture those payments you deducted in the first year and the second year even if, in the third year, your payment is substantially less than the first year.
As another example, if for a five year obligation in the first year you pay that $30,000, then in the second year you pay that $20,000, but, in the third year, your obligation is terminated because your ex remarriages, you do not have to recapture the payments you previously deducted even though you are paying $0 in the third year.