1. Home
  2. Taxes General Forum
  3. Alimony: 3 Year Recapture Rule

Alimony: 3 Year Recapture Rule

This popped up today with a client.

The 2008 divorce was going to call for alimony to be paid from Spouse A to Spouse B. Spouse B wanted it all at once. A discount rate was applied and the amount of alimony became a single payment of $20,000. The divorce decree identifies this as spousal support. I was doing quality review and cautioned the taxpayer, that it looked as if the IRS would treat this as excess alimony as the amount would decrease by more than $10,000 in the second year. I told the taxpayer that there could be a $5000 hit in 2010.

Was I right?

Reply to
Alan
Loading thread data ...

I'm too tired to do the math, but claimed alimony over 15,000 that significantly decreases the first three years has to be recaptured.

Recapture of alimony is described, along with worksheets, starting on page 15 of IRS Pub 504.

Reply to
Arthur Kamlet

The concept is correct from everything I've read. You got the $5K from the "Worksheet 1. Recapture of Alimony" in Pub 504? I did not try to work through it myself.

I assume your client was Spouse A. I wonder if the discount rate included tax effects?

-Mark Bole

Reply to
Mark Bole

I have not done the math but your theory is sound. The underlying concept is intended to prevent the misclassification what should have been a property settlement.

With that being said, and with the knowledge that your client is going to face a recapture issue in year 3 anyway, have you considered the possibility of simply writing down the alimony to an amount that will NOT cause a recapture? I am not even sure such a move is allowed or legal, but if it were my client I'd check into it.

Keep in mind, and remind your client, that as much as they would like to believe they can, state court judges have NO AUTHORITY to modify Federal tax law.

Good luck, Gene E. Utterback, EA, RFC, ABA

Reply to
Gene E. Utterback, EA, RFC, AB

Former spouse wanted the $20K all at once. That was the whole idea behind finding the present value of a stream of payments. She paid it. She needed better tax advice.

Reply to
Alan

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.