You may know that if you are paying alimony (or as it is typically called in New York, spousal maintenance or spousal support), that your payments are a tax deduction. However, there is a little-known rule called the Alimony Recapture Rule. If you fall into this rule, you will not be able to deduct your alimony and worse yet, the alimony you previously deducted will be counted as income.
The rule only applies to alimony payments during the first Three calendar years AFTER the divorce is final AND
a.) The payments in the 3rd year decrease by $15,000 or more from the payments made in the 2nd year; OR
b.) The payments made in the 2nd year and the 3rd year are substantially less than the payments made in the first year.
Here are two examples of when the Alimony Recapture Rule applies:
Example 1: In the first year you paid $20,000.00 in alimony and in the second year you also pay $20,000 in alimony, but, in the third year you only pay $5,000 in alimony. Here, your alimony payments decreased by $15,000 from the 2nd year.
Example 2: In the first year you paid $24,000 in alimony, but, in the 2nd year you only paid $10,000,00 and in the 3rd year you only paid $5,000.00. Here the payments you made in the 2nd and 3rd year are substantially less than what you paid in the first year.
In the examples stated above, you will have to report as income all three years of deductions that you took as alimony.
There are some limited exceptions to the Alimony Recapture Rule, but, you should consult with an accountant for more information.
It is fairly easy to avoid the Alimony Recapture Rule. When calculating your alimony payments, make sure they are not front loaded and that the amount you pay does not violate the rule.
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