Before You File: Recapture Rule Basics

Recapture. It sounds like a Lifetime Movie of the Week, in which the same villain kidnaps the heroine – twice. Or perhaps it’s a romance where an estranged couple ends up stranded in a mountain cabin where they “recapture” the spark that brought them together.

Unfortunately, where the IRS is concerned, it’s less entertaining. The recapture rule applies to many types of tax, but in this instance, I want to bring your attention to how it affects alimony payment deductions.

If you or your husband pays alimony to a former spouse, deducting those payments feels like a year-end bonus after twelve months of cutting checks to the ex. The alimony deduction can add up to a hefty sum, and keep that tax payment down to a manageable amount.

BUT, the IRS has rules about alimony payments, and if you don’t follow them to the letter, you could end up having to pay back the entire deduction – with penalties and interest. I cover this at length in my book, and here’s a link to the IRS page on alimony.

A quick snapshot of some of the issues pertaining to the alimony recapture rule:

 Alimony payments must be made in cash (including check or money order).

 Alimony payments must not include child support or a child-related expense. So, if you or your spouse pays family support (a combination of alimony and child support) you could have a problem.

 If alimony payments decrease or terminate in the first three years of the settlement, the payments could be subject to recapture.

It’s a good idea to read the alimony information at www.IRS.gov, because it also shows how some of your other financial obligations to the ex may be considered alimony and therefore would entitle you to additional deductions. Life insurance premiums and mortgage payments on a jointly owned property, for example.

If you or your spouse ay alimony, take five minutes to read the section in my book about the recapture rule, consult with a tax attorney or CPA, or read the fine print on the IRS website. Because if your sizeable alimony deduction is recapture, you could end up a subject of a Lifetime Movie, a fixer-upper tale that goes something like this: newlyweds go bankrupt and have to start over from scratch. Yup. A real feel-good flick.