Alimony recapture.

• Author: Ellentuck, Albert B.

Facts: Bob and Maggie Kensington divorced in February 2003; Maggie was awarded alimony under their divorce decree. Bob pays Maggie $45,000 in alimony in 2003, $25,000 in 2004 and $15,000 in 2005. Issue: Is Bob subject to alimony recapture?

Analysis

To prevent divorcing parties from disguising property settlement payments as alimony, payments that fail a mathematical test must be recaptured if they were deducted as alimony. A spouse who takes an alimony deduction in one year may have to recapture it by recognizing taxable income in a later year. Under Sec. 71(f)(1), a recipient spouse who recognized alimony income in one year may get an additional deduction in a later year. The Code focuses on short-term payments made for only three years after a divorce, without regard to a payment's nature.

When Does Recapture Occur?

For payments made under a divorce or separation instrument executed after 1986, recapture can occur under Sec. 71(f)(6) only in the third post-separation year. A "post-separation year" is any calendar year beginning with the first calendar year in which alimony is paid under a final divorce or separate maintenance decree (or a related written instrument) or separation agreement (not a temporary support order or interlocutory decree). The second and third post-separation years are the first two calendar years following the first post-separation year. Thus, for Bob and Maggie, 2003 is the first post-separation year; 2004 and 2005 are their second and third post-separation years, respectively.

How Is Recapture Computed?

Recapture is determined by comparing the alimony payments made in the third post-separation year to those made in the first and second years. If the first- and second-year payments exceed certain amounts, the sum of each year's excess is recaptured in year three.

Excess second-year payments are computed before excess first-year payments. Under Sec. 71(f)(4), excess second-year payments are payments made during the second year that exceed those made during the third year by more than $15,000.

Under Sec. 71(f)(3), the first-year payment to be recaptured is the amount by which such payments exceed $15,000, plus the average of the unrecaptured second-year payments, plus the third-year payments. Using the exhibit at left, Bob must recapture $10,000 of the 2003 (first-year) payment

Exceptions

Sec. 71 (f)(5) provides three exceptions to alimony recapture. First, payments made under a temporary support order or other...