Congress recognized the temptation to characterize property settlements as alimony, so the 1984 Tax Reform Act contains provisions calling for the recapture of “excess” alimony (that looks too much like a property settlement). Specifically, the rules provide that if alimony is excessively “front-loaded” (concentrated too much in the first two years of payments), the payor spouse must “recapture” it. (That means the payor spouse must include it in his or her gross income).
You know you’re safe if alimony doesn’t decrease by more than $10,000 during any one of the first three years in which alimony is paid. So one way to avoid excess alimony is simply to follow this simple rule and not mess with the calculations.
The calculation of Excess Alimony seems complicated at first glance, but you can figure it out if you really want to. Just stick with it and follow it through. Chances are you’ll want to print this sheet and work with the printed copy.
The Excess Alimony rules are limited in their effect to the first three years in which the payor spouse makes payments. The first measurement year is the calendar year in which alimony is first paid (called the 1st post-separation year). The second and third years are the immediately following calendar years (called the 2nd and 3rd post-separation years, respectively).
Only the excess alimony paid in the 1st and 2nd post-separation years is subject to recapture. There is no such thing as excess alimony paid in the 3rd post-separation year or later years.
The calculation of the front-loading rules is a five-step process, working in chronological order:
- Determine the excess of the alimony paid in the 2nd post-separation year over the sum of alimony paid in the 3rd post-separation year plus $15,000.
- Reduce the alimony paid in the 2nd post-separation year by any excess calculated in Step 1.
- Find the average of the alimony paid in the 2nd post-separation year (after reduction in Step 2) and the alimony paid in the third post-separation year.
- Determine the excess of the alimony paid in the 1st post-separation year over the sum of the average calculated in Step 3 and $15,000.
- Add the results of Step 1 and Step 4. The sum of these two figures is the excess alimony that must be reported as income by the payor spouse and may be claimed as a deduction by the payee spouse, in the 3rd post-separation year.
To check out a typical set of excess alimony calculations, look for “Excess Alimony” on the slow-loading Deeper In Taxes page.