What is a common mistake divorcing couples make that can have serious tax consequences?
Divorcing spouses must consider the consequences of what are called I.R.S. recapture rules.
A payor spouse must include as gross income any front-loaded spousal support, which are large payments in the first years of the divorce that diminish to nothing later. Recapture applies to alimony payments when the alimony paid decreases by more than $15,000 annually within a three-year period after a divorce. Alimony, as mentioned, is tax deductible to the payor and taxable to the payee, but if in a three-year period a taxpayer’s alimony decreases by more than $15,000 from the amount of the proceeding year, the I.R.S. regards the alimony payments as property distribution and recaptures the obligor’s income retroactively. In this, the I.R.S. recovers the tax benefit of a deduction or a credit taken by a taxpayer. Recapture means the I.R.S. disallows the deduction or credit. The purpose of recapture is to prevent a divorcing couple from dividing their property and calling the distribution alimony.