Alimony Calculator

You may have some tax complications to deal with if you're paying alimony to a former spouse, and the divorce agreement requires that a sum over $15,000 be paid in the first or second year following the divorce, but significantly less in the third year. When alimony payments decrease substantially or end during the first three calendar years, the alimony recapture rule can come into play. The three-year period starts with the first calendar year that alimony payments are made under a decree of divorce or separate maintenance or a written separation agreement.

What happens when a recapture occurs? At least part of the tax break is transferred from the alimony payer to the alimony recipient in the third year. Here's how it works. Specifically, part of the alimony you could deduct in the first two years is recaptured by being added to your taxable income in the third year. You don't have to worry about the recapture rule if there will be less than a $15,000 difference between payments in the first year and payments in each of the following two years. For example, payments of $45,000 in year one, $35,000 in year two and $35,000 in year three are okay. And $15,000 in year one followed by no alimony in year two or year three is okay.

You are also okay if the year three payment is within $15,000 of the year two payment and the average of the payments for years two and three is within $15,000 of the year one payment. For example, payments of $42,500 in year one, $35,000 in year two and $20,000 in year three are okay. But payments of $50,000, $35,000 and $20,000 would result in $7,500 of alimony recapture.

In the third year, the person making the payments must report the recapture amount as taxable income. In effect, part of the alimony payer's deductions for the first two years are "recaptured" as they say in tax jargon. In the same year, the person receiving the payments is entitled to a deduction for the recapture amount. In effect, part of the recipient's taxable alimony income from the first two years is negated by the year three write-off.

When calculating alimony recapture, the payments must meet certain criteria in order to fall under the alimony recapture rule. Payments made under a temporary support order do not count towards the payment recapture rule. The alimony payments must be part of a permanent alimony order. Payments required over a period of at least three calendar years based on a fixed percentage of income from a business, a property, salary or self-employment do not count. In other words, don't count payments that are intended to vary according to your income if such variable payments extend over at least three years. Payments that decrease because of the death of either former spouse or the remarriage of the former spouse receiving the payments do not count.

The tax implications of alimony can seem complicated. There are alimony recapture calculators online if you need assistance calculating the alimony recapture. If you have any questions, consult an accountant or tax professional.

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