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The Alimony Recapture Rule

The recapture rule is a federal tax concept that is triggered if alimony payments decrease or end within the first three calendar years of when the first qualifying payment of alimony under divorce decree or separation agreement is made. Indiana does not have alimony but does have spousal maintenance which may be treated the same way by the IRS.

The recapture rule forces the alimony payer to report as income the alimony payments he previously deducted on his taxes. This allows the alimony receiver to reduce the alimony he or she received from reported income. The recapture rule applies when alimony payments either decrease or terminate during the first three years after divorce and if either the total payments made in the third year decrease by $15,000 or greater (from payments made in the second year) or the payments made in the second and third years are substantially less that the payments made in the first year.

When is the Recapture Rule Triggered?

An alimony payer is subject to the recapture rule in his/her third year if the alimony paid in the third year decreases by more than $15,000 from the second year or if the alimony paid in the second and third year decreases significantly from the alimony paid in year one. Alimony is often reduced or terminated for various reasons, but the following will trigger the recapture rule:

  • Change in divorce decree or separation agreement
  • Failure to make timely payments
  • Reduction in ability to provide support/make payments
  • Reduction in ex-spouse’s support needs

There are exceptions to the recapture rule. The rule does not apply for payments made pursuant to a temporary court order, if payments terminate due to death of either the payer or receiver, the receiver remarries before the end of the third year, or the total payments made each year vary and are tied to a business, property, or employment (i.e. agreeing to pay a percentage of income received from business).

For those who are paying alimony to an ex-spouse and are hoping to modify the amount paid, this might sound like a confusing concept. While seeking a reduction of alimony might seem beneficial, there could be greater consequences depending on the timing and the amount of the alimony reduction.

Let’s say your ex gets a new job and you want to reduce your alimony owed. Your modification motion is successful in court. You were paying your ex $25,000 in alimony the first year, $20,000 the second year and your motion now reduces your obligation to $3,000 in the third year. This $17,000 reduction in the third year from the second year has triggered the recapture rule. Now the alimony paid the first and second years must be reported as income despite the fact that they were formerly tax deductions.

Talk to an Attorney

Before you seek to modify or terminate alimony you should always consult an attorney who practices in family law matters. An attorney can assist in obtaining your desired court result and discuss your options along with tax implications of changes to alimony obligations.

Attorney Christopher L. Arrington is a family law attorney representing clients in Danville, Indiana and surrounding counties. If you have gone through a divorce and are making maintenance payments and hope to modify your obligation to an ex-spouse, contact our firm first. Just like other aspects of divorce, the tax implications of an maintenance modification can be a critical financial concern. Contact our office today to discuss your case.



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