-By Stefanie Jedra, CPA and Amy Sara Cores, Esq.
Before the Tax Cuts and Jobs Act (“TCJA”), which was enacted on December 22, 2017, alimony was deductible for federal and state tax purposes. With the deductibility of alimony came the dreaded discussion of alimony recapture, which could cause alimony to be taxable if payments were frontloaded. The Internal Revenue Code (“I.R.C.”) outlined the calculation to determine whether alimony payments had been frontloaded in I.R.C. § 71(f).
For divorces finalized after December 31, 2018, alimony is no longer deductible for federal tax purposes and in most states. It seems as though alimony recapture is something that we have not had to think about when drafting inter-spousal agreements for the last few years. While alimony is deductible for state tax purposes in six states (namely, Arkansas, California, Massachusetts, New Jersey, New York, and Pennsylvania), the state tax laws in these jurisdictions do not mention alimony recapture or any similar disincentive to front-load alimony payments. So why are we talking about it now, is alimony recapture even a thing anymore? It is.
I.R.C. § 71(f) outlines the calculation to determine whether there has been front-loading of alimony payments leading to alimony recapture. The calculation involves 2 years post separation. As we all know, there was a rush to finalize divorces in 2018 in order for clients to be grandfathered-in and maintain the deductibility of alimony going forward. We are now in the 2020 tax season and alimony recapture may really be a thing right now. For that reason, a brief refresher is appropriate.
For divorces finalized in 2018:
In the first-year post-separation (or 2019) alimony was taxable to the extent that payments received in the first-year post-separation exceeded $15,000 plus the average of:
- alimony or separate maintenance payments paid by the payor spouse during the 2nd post-separation year, reduced by the excess payments for the 2nd post-separation year, and
- the alimony or separate maintenance payments paid by the payor spouse during the 3rd post-separation year. I.R.C. § 71(f)(3)
In the second-year post-separation (or 2020) alimony was taxable to the extent that payments received in the second-year post-separation exceeded $15,000 plus:
- the amount of the alimony or separate maintenance payments paid by the payor spouse during the 3rd post-separation year. I.R.C. § 71(f)(4)
Unless alimony becomes tax deductible again, and the repeal of I.R.C. § 71 is revoked, this may be the last time that alimony recapture is a pertinent issue for many of our clients.
Amy Sara Cores, Esq. is a Fellow of the International Academy of Family Lawyers, Certified by the Supreme Court of New Jersey as a Matrimonial Law Attorney, a Fellow of the American Academy of Matrimonial Lawyers, and a National Board of Trial Advocacy Board Certified Family Law Trial Advocate. She is the owner of Cores & Associates, LLC a boutique family law firm in Freehold, New Jersey where she handles a variety of complex and high conflict family law cases.
Stefanie Jedra, CPA is a business valuation and forensic accounting expert who specializes in valuation of privately held businesses, complex asset tracing, cash flow and lifestyle analyses, and analyses related to equitable distribution.