Alimony recapture.Facts: Bob and Maggie Kensington divorced in February 2003; Maggie was awarded alimony alimony, in law, allowance for support that an individual pays to his or her former spouse, usually as part of a divorce settlement. It is based on the common law right of a wife to be supported by her husband, but in the United States, the Supreme Court in 1979 under their divorce decree decree, in law, decision of a suit in a court of equity. It is the counterpart in equity of the judgment in a court of law, although in those jurisdictions where law and equity have merged, judgment is sometimes used to include both. . Bob pays Maggie $45,000 in alimony in 2003, $25,000 in 2004 and $15,000 in 2005. Issue: Is Bob subject to alimony recapture recapture n. in income tax, the requirement that the taxpayer pay the amount of tax savings from past years due to accelerated depreciation or deferred capital gains upon sale of property. (See: income tax) RECAPTURE, war. ? Analysis To prevent divorcing parties from disguising dis·guise tr.v. dis·guised, dis·guis·ing, dis·guis·es 1. a. To modify the manner or appearance of in order to prevent recognition. b. To furnish with a disguise. 2. property settlement payments as alimony, payments that fail a mathematical test must be recaptured if they were deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. as alimony. A spouse spouse A legal marriage partner as defined by state law who takes an alimony deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. in one year may have to recapture it by recognizing taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. in a later year. Under Sec. 71(f)(1), a recipient spouse who recognized alimony income in one year may get an additional deduction in a later year. The Code focuses on short-term payments made for only three years after a divorce, without regard to a payment's nature. When Does Recapture Occur? For payments made under a divorce or separation instrument executed after 1986, recapture can occur under Sec. 71(f)(6) only in the third post-separation year. A "post-separation year" is any calendar year beginning with the first calendar year in which alimony is paid under a final divorce or separate maintenance decree (or a related written instrument) or separation agreement (not a temporary support order or interlocutory decree interlocutory decree n. a court judgment which is temporary and not intended to be final until either a) other matters come before the judge, or b) there is a specified passage of time to determine if the interlocutory decree (judgment) is "working" (becomes accepted ). The second and third post-separation years are the first two calendar years following the first post-separation year. Thus, for Bob and Maggie, 2003 is the first post-separation year; 2004 and 2005 are their second and third post-separation years, respectively. How Is Recapture Computed? Recapture is determined by comparing the alimony payments made in the third post-separation year to those made in the first and second years. If the first- and second-year payments exceed certain amounts, the sum of each year's excess is recaptured in year three. Excess second-year payments are computed before excess first-year payments. Under Sec. 71(f)(4), excess second-year payments are payments made during the second year that exceed those made during the third year by more than $15,000. Under Sec. 71(f)(3), the first-year payment to be recaptured is the amount by which such payments exceed $15,000, plus the average of the unrecaptured second-year payments, plus the third-year payments. Using the exhibit at left, Bob must recapture $10,000 of the 2003 (first-year) payment Exceptions Sec. 71 (f)(5) provides three exceptions to alimony recapture. First, payments made under a temporary support order or other decree are not alimony for recapture purposes. Second, payments that fluctuate based on a fixed percentage of income from a business, property or compensation for employment (or self-employment) are not alimony for recapture purposes, unless the payer is obligated ob·li·gate tr.v. ob·li·gat·ed, ob·li·gat·ing, ob·li·gates 1. To bind, compel, or constrain by a social, legal, or moral tie. See Synonyms at force. 2. To cause to be grateful or indebted; oblige. to make such payments for at least five years. Finally, if alimony payments terminate before the end of the third year due to death of either spouse or remarriage Re`mar´riage n. 1. A second or repeated marriage. Noun 1. remarriage - the act of marrying again of the recipient spouse, alimony recapture does not apply. Conclusion The recapture rules are strict and must be carefully considered when negotiating alimony. To avoid recapture, first-year payments should not exceed second-year payments by more than $7,500; second-year payments should not exceed third-year payments by more than $15,000. The alimony payment schedule should include some alimony payable in the third year. Finally, payments should be started late in the first year, so that fewer payments are made in that year and more in the second year. Editor's note Editor's Note (foaled in 1993 in Kentucky) is an American thoroughbred Stallion racehorse. He was sired by 1992 U.S. Champion 2 YO Colt Forty Niner, who in turn was a son of Champion sire Mr. Prospector and out of the mare, Beware Of The Cat. Trained by D. : This case study has been adapted from "Tax Planning Tax planning Devising strategies throughout the year in order to minimize tax liability, for example, by choosing a tax filing status that is most beneficial to the taxpayer. for High Income Individuals," 3d Edition, by Anthony J. DeChellis, Douglas L Weinbrenner, Catherine A. Roeder and Patrick L. Young, published by Practitioners Publishing Company, Fort Worth, Tex., 2002 ((800) 323-8724; www.ppcnet.com).
Exhibit: Alimony recapture computation worksheet
Instructions: Use this worksheet during the negotiation and drafting
stages of a divorce or separation process to ensure that payments do
not result in unexpected alimony recapture. Also use it at the end of
the third year to determine the amount (if any) of alimony recapture
to be included in the divorcing parties' tax returns. The references
to first, second and third years are to post-separation years as
defined in the Code and related regulations.
Client:
Prepared by: Date:
This worksheet applies to instruments executed after 1984. Do not enter
less than zero on any line.
1. Alimony paid in second year $--
2. Alimony paid in third year $--
3. Floor 15,000
4. Add lines 2 and 3
5. Excess alimony paid in
second year (line 1 - line 4) $--
6. Alimony paid in first year
7. Adjusted alimony paid in
second year (line 1 - line 5)
8. Alimony paid in third year
9. Add lines 7 and 8
10. Average alimony paid in
second and third years
(line 9 x 50'%)
11. Floor 15,000
12. Add lines 10 and 11
13. Excess alimony paid
in first year (line 6 - line 12) $--
14. Recaptured alimony
(line 5 + line 13)
Editor: Albert B. Ellentuck, Esq. Of Counsel King and Nordlinger, L.L.P. Arlington, VA |
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