The Taxes That Got Away: Alimony Recapture Rules

One of the few advantages of paying alimony is that the money is tax deductable. That may not take the all the sting out of New York state spousal support but it eases the pain a little. Unfortunately that pain can come back redoubled when the payer gets a polite letter from the IRS saying taxes are owed on alimony from previous years. That’s the joy of alimony recapture.

The IRS keeps a close eye on tax deductions to ensure that nobody is using them inappropriately. If alimony payments decrease rapidly over the first three years after the divorce, the IRS may come back and disallow the tax deduction. This is because some unscrupulous people–not you of course–try to disguise divorce property settlement payments as alimony to avoid paying taxes.

Of course there are legitimate reasons that spousal support will decline and as long as one of the conditions apply, there won’t be any alimony recapture. For example the payer might be self-employed so alimony payments fluctuate as the business income varies. As long as the condition is included in the divorce settlement agreement then the IRS will go away happy–and empty-handed.

Then again sometimes the spousal support agreement is renegotiated after a change in one spouse’s financial status and this can trigger recapture. Attorneys can use family law software to calculate the effect of alimony recapture to help both parties determine if the change if alimony is financially advantageous. It might actually be cheaper to continue to pay the higher support amount to avoid triggering recapture.

Family law attorneys should explain recapture to their clients, especially if the client is the one paying support. This prevents any future IRS action from coming as a surprise. Payers shouldn’t get upset if they are notified of recapture action, especially if they can demonstrate the change in alimony falls under one of the exceptions listed under IRS regulations.

Spousal support is a complex calculation and, as you can see, the calculations aren’t over just because the divorce decree is signed. Stay on top of all your divorce cases, past and present, by using legal practice management software that documents all details as well as calculating spousal maintenance, child support, and the effect of possible recapture action.