Deduction of early years' divorce payments.For a taxpayer in the midst Adv. 1. in the midst - the middle or central part or point; "in the midst of the forest"; "could he walk out in the midst of his piece?"
midmost of a divorce settlement, the proper tax advice on structuring the settlement may provide tax benefits for years to come. Neither property settlements nor child support are deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). for income tax purposes. However, if a payment is classified as 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 , the spouse spouse A legal marriage partner as defined by state law paying the alimony receives a 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. for the amount paid in computing computing - computer adjusted gross income under Sec. 215 (a). (For purposes of this discussion, alimony includes separate maintenance.)
Sec. 71 (f) provides anti-front-loading rules that partially treat early years' excessive payments as property settlements. These rules 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. and recharacterize alimony as property settlements, to the extent the alimony paid in the early years is deemed to be excessively front-loaded. This recharacterization treats the excess payments as deductible by the payee The person who is to receive the stated amount of money on a check, bill, or note.
payee n. the one named on a check or promissory note to receive payment.
PAYEE. The person in whose favor a bill of exchange is made payable. spouse and includible in the payor's gross income when the excess is recaptured in the third "post-separation year" (Sec. 71 (f) (1)).
When analyzing a proposed divorce settlement to maximize income tax deductions Tax deduction
An expense that a taxpayer is allowed to deduct from taxable income.
See deduction. for the payor spouse, it is important to remember that the anti-front-loading rules operate on a three-calendar-year basis (Sec. 71 (f) (6)). The three-year period begins with the first calendar year in which the payor spouse pays alimony to the payee spouse. This year is referred to as the first "post-separation year." Only excess payments made in the first and second post-separation years are recaptured.
Example 1: Computation of Excess Payments
H and W are divorced on Jan. 2, 1996 H will pay $60,000 alimony to W in 1996, $30,000 in 1997, and $10,000 in 1988. The excess payments recaptured in 1998 will be $32,500, computed as follows:
1997 (second year) excess payments
1997 alimony payments $30,000 Less: 1998 alimony payments $10,000 Statutory allowance 15,000 25,000 Excess Payments $ 5,000
1996 (first year) excess payments
1996 alimony payments $60,000 Less: 1997 alimony payments $30,000 Reduction for 1997 excess payments (5,000) Balance 25,000 1998 alimony payments 10,000 Total $35,000
Average ($35,000 [divided by] 2) 17,500 Statutory allowance 15,000 32,500 Excess payments $27,500
Total excess payments
For 1997 $ 5,000 For 1996 27,500 Total recaptured in 1998 (third year) 32,500
The excess payment for the second post-separation year are the excess (if any) of that year's alimony payments over $15,000 plus the third year's alimony payments. The excess payments for the first year are the excess (if any) of that year's alimony payments over $15,000, plus the average of the alimony paid during the second year, less any excess payments for such year, and the alimony paid during the third year. This statutory formula, prescribed pre·scribe
v. pre·scribed, pre·scrib·ing, pre·scribes
1. To set down as a rule or guide; enjoin. See Synonyms at dictate.
2. To order the use of (a medicine or other treatment). by Sec. 71 (f) (3) and (4), is illustrated in Example 1 above.
The effect of this statutory formula is exemplified in the following example:
Example 2: Under a divorce settlement proposed for 1996, H would make a $250,000 alimony payment to W in that year and no payments in 1997 or 1998. Consequently, $235,000 would be recaptured in 1998. However, there would not be any recapture if the alimony was paid as follows:
1996 $ 93,333 1997 85,833 1998 70,834 Total $250,000
In addition, the divorce settlement should contain a "termination upon death" provision, stating that H's liability for payments will terminate at W's death. If W accepts this three-year payout pay·out
1. The act or an instance of paying out.
2. A percentage of corporate earnings that is paid as dividends to shareholders. , it is possible to substantially reduce H's income tax by structuring his alimony payments within Sec. 71 (f)'s parameters.