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Alimony and the Recapture Rule

"The term alimony usually and technically
means an allowance for spousal support and is distinguishable from property
division and child support." In Re
Marriage of Sjulin
, 431 NW2d 773 (Iowa 1988). Essentially, in situations
where alimony is applicable, the higher earner pays spousal support to the
lower earner "based primarily upon a continuing duty to support . . . ." Dubicki v. Dubicki, 186 Conn. 709, 714,
footnote 2, 443 A.2d 1268 (1982). The award of alimony is governed by Connecticut
General Statutes § 46b-82.

What are the Tax Implications of Alimony?

"Alimony or separate maintenance payments are, under section
71, included in the gross income of the payee spouse, and, under section 215,
allowed as a deduction from the gross income of the payor spouse." 26 CFR Chap.
1, §1.71-1T (2012). Meaning that generally, alimony payments are taken as a tax
deduction by the payor spouse and part of the gross income for the spouse
receiving the alimony payments; this means that the spouse paying alimony gets
a tax break from paying his or her alimony support obligation.

What is the Recapture Rule?

The Recapture Rule is a safeguard implemented by the
Internal Revenue Service and should be considered when drafting your alimony
obligation in your Marital Settlement Agreement.

Specifically, the year that you first make a qualifying
alimony support payment under a decree of divorce or separate maintenance or a
written separation agreement, begins the timing of a three year period of
review. You do not include any temporary or pendente lite support orders in the
calculation of this three year period.

If during those three
years your alimony "payments decrease or end ... you may be subject to the
recapture rule. If you are subject to this rule, you have to include in income
in the third year part of the alimony payments you previously deducted. Your
spouse can deduct in the third year part of the alimony payments he or she
previously included in income.

The reasons for a
reduction or end of alimony payments that can require a recapture include:

  • A change in your divorce or separation instrument,
  • A failure to make timely payments,
  • A reduction in your ability to provide support, or
  • A reduction in your spouse's support needs."United States Internal Revenue Service,
    Publication 17, Your Federal Income Tax,
    Part 4,Adjustments to Income, Chapter
    18,Alimony(2012).Available at:<http://www.irs.gov/publications/p17/ch18.html#en_US_2012_publink1000172912>

What is the Purpose of the Recapture Rule?

This rule is intended to prevent the person making alimony
payments whose divorce occurred near the end of the calendar year from making
deductible property settlements at the beginning of the calendar year. The IRS
had noticed that some people had been disguising property settlements, which
are non-deductible as alimony payments which are deductible. The Recapture
Rule's purpose is to prevent the obtainment of a beneficial tax break from
payments that are not truly alimony support payments.

When does the Recapture Rule Apply?

One is "subject to the recapture rule in the third year if
the alimony you pay in the third year decreases by more than $15,000 from the
second year or the alimony you pay in the second and third years decreases
significantly from the alimony you pay in the first year.

When you [calculate]
a decrease in alimony, do not include the following amounts.

  • Payments made under a temporary support order.
  • Payments required over a period of at least 3 calendar
    years that vary because they are a fixed part of your income from a business or
    property, or from compensation for employment or self-employment.
  • Payments that decrease because of the death of either
    spouse or the remarriage of the spouse receiving the payments before the end of
    the third year." Id.

In order to calculate the recapture, you can use Worksheet 1
in the IRS Publication 504.

For more information on Alimony support and the Recapture
Rule you can visit www.irs.gov, or contact the
Attorneys at Mariani Reck Lane, LLC.

_______________________________________

This information is intended to provide general information
only and is not intended and should not be relied on as legal advice. You are
encouraged to consult with appropriate legal counsel.

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