Thursday, June 21, 2012


FYI-Flint Divorce Bankruptcy Attorney Terry R. Bankert 235-1970,  asks DID YOU KNOW?.From Creative Tax and Financial Planning to Settle the Challenging Divorce Case Joseph W. Cunningham Joseph W. Cunningham JD CPA PC Troy

What are Section 71 payments?

1. They are essentially another name for alimony, or spousal support, payments
that qualify as taxable to the payee under IRC Section 71 and deductible by
the payer under IRC Section 215.

C. What are the “front loading” rules

1. In addition to the above Section 71 requirements, a series of payments must
not be excessively “front loaded”.

2. This means that payments scheduled over a period of years may not be
skewed toward the front end of the period so that a disproportionately large
portion of the total will be paid in the early years of the payment schedule
(which would be the tendency if the payments actually represented property
rather than support).

3. The front-loading rules are more complicated than the other requirements
under IRC 71. But, a basic understanding is necessary for attorneys to effectively
use Section 71 payments.

a. In short, payments that are excessively front loaded during a three-year
measuring period must be “recaptured”, which means that the payer,
who deducted the payments, must now report them as income, and the
payee, who was originally taxed on the payments, is now entitled to a

b. If a decline in payments that would otherwise result in alimony recapture
occurs because of one of the following events, no recapture is
• death of either spouse
• remarriage of the payee spouse
• fluctuations of income outside the control of the payer provided
the payer is obligated to pay a fixed portion or percentage of an
income stream (such as a bonus paid pursuant to a formula, rent or
royalty income from a property interest, etc.) for at least three

c. Recapture is determined according to when payments are actually
made, not when they are scheduled.

d. Recapture rules do not apply to temporary alimony paid during pendency

of divorce.

4. Steps for computing alimony recapture

a. The measuring period is the three successive calendar years beginning
with the year in which payments commence pursuant to the divorce or
separation instrument. They are referred to as the “post-separation
years.” The test for recapture consists of the following two steps.

i. The total paid in the third calendar year is added to a $15,000 statutory
allowance. The sum is then subtracted from the total paid in
the second year. Any difference is recapture.

ii. Then the average of payments made in years two (net of recapture,
if any) and three is added to the $15,000 statutory allowance. The
sum is subtracted from the total paid in year one. Once again, any
difference is recapture

b. The total amount of recapture from years one and two is reported as
income by the payer and claimed as a deduction by the payee in year

c. Examples illustrating the application of the alimony recapture rules are
presented on Exhibit 1.

5. Rules of Thumb Regarding Alimony Recapture—Awareness of a few simple
rules of thumb is generally sufficient to avoid running afoul of recapture

a. Declining Payments Only—Recapture only applies to a schedule of
payments that declines from year to year over the three-calendar-year
measuring period. It does not apply if payments are level or increase.

b. $15,000 Threshold—If payments do not exceed $15,000 annually,
there cannot be recapture because of a $15,000 statutory allowance.
The rules only come into play if payments total more than $15,000 in
first and/or second of the three calendar years beginning with the first
year in which payments are made.

c. $10,000 Safe Harbor—There will never be recapture if the reductions
in total payments between years one and two and then between years
two and three do not exceed $10,000 each. To illustrate, no recapture
results from the payment schedule shown below: