It's Wise To Figure Possible Alimony Recapture Before You Sign An Agreement. Here's The Formula.
Avoid the Recapture Rules of 71
AVOIDING "RECAPTURE" OF ALIMONY
Since the Tax Reform Act of 1986, the IRS has tried to reduce what is known as "front-end loading" which disguised non-deductible property settlements as deductible alimony payments.
All settlement agreements and decrees signed after December 31, 1986 are subject to what is known as a "three-year look back" period. The paying spouse may be required to "recapture" income in the third year excess alimony payments if (1) the alimony paid in year two exceeds the payments made in year three by more than $15,000; or (2) the alimony paid in year one exceeds the average annual alimony paid in years two and three by more than $15,000. In either situation, the excess is recaptured.
Exceptions: (1) If the payment stops due to the death of either spouse; (2) if the receiving spouse remarries; or (3) the amount of the alimony payments change are not controlled by the paying spouse – such as if the paying spouse is obligated to pay as alimony a fixed percentage of salary or of income from a business or property.
To compute recapture, you can use this worksheet:
1: Determine Recapture for Year 2
1. Insert alimony paid in year 2 = $______
2. Insert alimony paid in year 3 = $______ plus $15,000 = $ ______
3. Then, subtract line 2 from line 1 (not less than zero) $______
2: Determine Recapture Base for Year 1
4. Insert alimony paid in year 2 = $ ______
5. Insert result in line 3 above (year 2 recapture) = $ ______
6. Then subtract line 5 from line 4 (not less than zero) = $______
7. Insert alimony paid in year 3 = $ ______
8. Then, add lines 6 and 7 = $ ______
9. Then divide line 8 by 2 = $ ______
10. The floor for recapture is 15,000
11. Then add line 9 to line 10 = $ ______
3: Determine Recapture for Year 1
12. Insert alimony paid in year 1 = $ ______
13. Insert result from line 11 above = $ ______
14. Then, subtract line 13 from line 12 (not less than zero) = $ ______
4: Determine Total Recapture
15. Insert result from line 3 = $ ______
16. Insert result from line 14 = $ ______
17. Then, add line 15 to line 16 = $ ______
The Result in 17 is the total recapture amount
© 1997, Flying Solo. This information is general in nature and is not intended to be construed as legal advice. Because all situations are different, do not make any decisions until you have consulted with the legal professional of your choice.
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