37.7 3rd Year Recapture If Alimony Drops by More Than $15,000

The recapture rules are designed to prevent the so-called “front loading” of property settlement payments disguised as alimony. However, the rules apply even where no property settlement was intended if you come within their terms. For example, the recapture rules may be triggered where several scheduled payments in the first year are missed and paid in the second year.

In general, deductible payments you make in the first year or second year are recaptured (that is, reported as income) in the third year where payments within the first three years decline by more than $15,000. The three years are called “post-separation years.” The first post-separation year is the first calendar year in which you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a separation agreement. The period does not begin with the year of the decree or agreement if no payments are made. Recapture does not apply to temporary support payments made before the final decree or agreement. The second and third post-separation years are the next two calendar years after the first post-separation year whether or not payments are made during those years.

Payments made in the second post-separation year are recaptured if the payments exceed the payments made in the third post-separation year by more than $15,000. Payments made in the first post-separation year are recaptured if they exceed the average payments made in the second post-separation year and the third post-separation year by more than $15,000. The Examples below illustrate how to make these computations.

Filing Tip

Reporting Recapture on Your Return

The payer-spouse reports the recaptured amount as income in the third year and the payee-spouse claims a deduction for the same amount. The payer reports the recaptured amount on Form 1040, Line 11 (alimony received); cross out “received” and write “recapture” along with the payee-spouse’s Social Security number.

The payee-spouse deducts the recaptured amount on Form 1040, Line 31a (alimony paid). He or she crosses out the word “paid” and writes “recapture,” and also enters on that line the payer-spouse’s Social Security number.

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When recapture does not apply.

Recapture is not triggered if payments in both the first and second post-separation years do not exceed $15,000. Recapture also does not apply to:

• Payments made under a continuing liability to pay for at least three years a fixed part of your income from a business or property or from a job or self-employed business or profession, or
• Payments that end because of your death or the death of your former spouse or the remarriage of your former spouse at any time before the end of the third post-separation year.

The steps of recapture are: