Under federal and state income tax law, alimony is deductible by the payor spouse and reportable as income to the dependent spouse, provided that the following criteria are met: (1)the payments are in cash and not in kind; (2) the payments are made incident to divorce or to a separation agreement; (3) the parties have not designated the payments as non-alimony; (4) the parties are not living in the same household; and (5) the payor has no liability for payment after the death of the payee spouse. While the parties may privately agree that the tax deduction and the taxable income aspects of federal alimony law shall not apply, the parties may not by private stipulation create “alimony payments” that do not meet the five federal criteria and yet attempt to obtain the tax deduction for the payor. Alimony is normally deductible to the spouse who pays the alimony and it is included in the income of the spouse receiving the alimony. However, in some circumstances, a paying spouse may later be required to relinquish that deduction and include, as income, a portion of the alimony previously paid. This result can occur when the IRS believes that spouses are attempting to disguise property settlements as alimony payments in order to receive a more favorable tax treatment. Under the recapture rule, a spouse who pays alimony will be required to recapture any excess alimony paid during the first three years after the parties separate. The three-year time period begins in the first year that the spouse makes alimony payments to the other spouse. The recapture calculation is viewed by many as extremely complex. In general, if the amount of alimony paid in year three, plus $15,000, is less than the amount of alimony paid in year two, the excess will be recaptured. In addition, if a comparison of the first year’s payment to the average of payments made in years two and three show that the average of years two and three, plus $15,000, is less than the amount paid in year one, the excess amount will again be recaptured. The spouse who paid the excess amount would then have to include that amount in his or her income and pay taxes on it, while the spouse receiving the excess amount would get to take a corresponding deduction. This potential tax pitfall catches many divorcing couples off-guard and should definitely be discussed with both your divorce lawyer and your tax advisor.