R is for Recapture Rule (Alimony).
The rules for regular alimony payments are pretty simple.
If you receive alimony payments, you report those payments as income at line 11.
If you make court-ordered alimony payments, you can deduct those on your federal income tax return. The deduction is an “above-the-line” deduction, meaning that you don’t have to itemize your deductions in order to take advantage of the tax break. You would claim those payments on line 31a.
Of course, life isn’t all that simple. Things change. When circumstances change, your alimony payments might change. That could happen because of the language or a change in your divorce decree, failure to make payments, an inability to pay support because you lost your job or other financial difficulties, or a change in your spouse’s needs. Whatever the reasons, you might be subject to what is called the recapture rule.
If your alimony payments decrease or end during the first three calendar years after they begin, you may be subject to the recapture rule. For purposes of the recapture rule, the three year period starts with the first calendar year you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a written separation agreement (do not start the clock if the payments were made under temporary support orders). The second and third years are the next two calendar years, even if you don’t make any payments during those years.
To figure if the rule applies to you, total your alimony payments in each of the three years. 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, the rule applies. Don’t figure include any time in which payments were made under temporary support orders or if payments vary because they are a fixed part of your income from a business or property, or from compensation for employment or self-employment. You would also not include 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.
If the rule applies to you, you have to “recapture” as income part of the alimony payments that you previously deducted on line 31. This time, you’ll report it on your federal form 1040, line 11. Cross out the word “received” and write “recapture.” Write your spouse’s last name and SSN or ITIN next to the amount.
The converse is also true which means that, in that third year, your spouse can deduct that part of the alimony payments previously included in income. Your spouse will include the amount on line 31a. He or she will cross out “paid” and write “recapture.” In the space provided, your spouse will include your SSN or ITIN.
So why the reason for the crazy rules? Remember when I said that it only applied in the first three years after the divorce decree? It turns out that some folks came up with the idea that they could structure support payments under the decree to disguise non-deductible settlement payments as alimony payments. Voila, deductible! Only the IRS didn’t like that. Thus, the recapture rules.
The same isn’t true for child support. Keep in mind that child support payments are tax neutral: that means they are neither income to the recipient nor deductions to the person making the payments.
