Maryland Divorce Tips – How to Avoid Alimony Recapture

Maryland Divorce Tips – How to Avoid Alimony Recapture

Alimony payments made in Maryland divorce cases are most times deductible as long as the payments meet the IRS criteria below:

  1. Payments must be made in cash or cash equivalents
  2. There must be a written separation agreement or court order designating the payments as alimony
  3. Neither spouse opts out of the tax treatment of alimony
  4. Spouses cannot be members of the same household at the time payment is made after the final decree
  5. The obligation to make payments must terminate upon the payee spouse’s death
  6. A joint tax return cannot be filed
  7. Any portion of the payment that is considered child support is not deductible

Financial Divorce Help Annapolis MDOccasionally when the payer of alimony gets wind of tax benefits of alimony, he or she may want to “front-load” the payments, i.e. pay a significant amount in the first year or two. What this amounts to is converting a tax-free property transfer into tax deductible payment by the payor of the alimony.

The IRS wised up to this years ago and enacted rules to prevent excess front loading of alimony payments. Alimony payments that decrease or stop during the first three years may be subject to the recapture rule. If there is no decrease in alimony in excess of $15,000 in year two or year three following the year of divorce, the recapture rule will not apply.

So what happens if there is recapture? In the third year the amount to be recaptured is added back (taxed) to the payer’s income and subtracted (deducted) from the payee’s income.

In addition to the $15,000 limitation, there are other exceptions to the rule:

  1. If either spouse dies, or if the spouse entitled to the alimony payments remarries prior to the end of the third post-separation year
  2. The amount of payments fluctuates for reasons beyond control of the payer (e.g. payer pays a fixed percentage of income)
  3. The payments are temporary support payments (prior to filing for divorce)

The key to avoiding this dilemma is proper pre-divorce planning and having a CDFA™ run the calculation prior to signing a settlement agreement.

John Faggio CPA,CFP® is a Certified Divorce Financial Analyst™. Faggio Financial is central Maryland’s exclusive divorce financial planning firm. We provide our clients with the financial clarity and creativity in developing their separation and divorce agreement. Start saving time, energy, and money in your divorce and email or call John at 410-988-7333 for an initial flat-fee consult.

About the Author:

John Faggio is the managing director of Faggio Financial, LLC (www.divorce-finances.com), Maryland's only exclusive matrimonial finance practice. John is a CPA, a Certified Financial Planner® Professional, and a Certified Divorce Financial Analyst (CDFA®).

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