Deduction of early years' divorce payments.

• Author: Tobin, Brian F.

For a taxpayer in the midst of a divorce settlement, the proper tax advice on structuring the settlement may provide tax benefits for years to come. Neither property settlements nor child support are deductible for income tax purposes. However, if a payment is classified as alimony, the spouse paying the alimony receives a deduction for the amount paid in computing adjusted gross income under Sec. 215 (a). (For purposes of this discussion, alimony includes separate maintenance.)

Sec. 71 (f) provides anti-front-loading rules that partially treat early years' excessive payments as property settlements. These rules recapture and recharacterize alimony as property settlements, to the extent the alimony paid in the early years is deemed to be excessively front-loaded. This recharacterization treats the excess payments as deductible by the payee spouse and includible in the payor's gross income when the excess is recaptured in the third "post-separation year" (Sec. 71 (f) (1)).

When analyzing a proposed divorce settlement to maximize income tax deductions for the payor spouse, it is important to remember that the anti-front-loading rules operate on a three-calendar-year basis (Sec. 71 (f) (6)). The three-year period begins with the first calendar year in which the payor spouse pays alimony to the payee spouse. This year is referred to as the first "post-separation year." Only excess payments made in the first and second post-separation years are recaptured.

Example 1: Computation of Excess Payments

H and W are divorced on Jan. 2, 1996 H will pay $60,000 alimony to W in 1996, $30,000 in 1997, and $10,000 in 1988. The excess payments recaptured in 1998 will be $32,500, computed as follows:

1997 (second year) excess payments

1997 alimony payments $30,000 Less: 1998 alimony payments $10,000 Statutory allowance 15,000 25,000 Excess Payments $ 5,000

1996 (first year) excess payments

1996 alimony payments $60,000 Less: 1997 alimony payments $30,000 Reduction for 1997 excess...