Final answer:
The alimony recapture rules impact the payor of alimony, not the recipient. If recapture applies, the recipient may decrease his or her AGI by the recaptured amount. It's crucial to note that the recapture rules may not apply in all situations and tax laws can change over time, such as with recent legislation affecting the treatment of alimony. Option 1 is correct answer.
Step-by-step explanation:
When the alimony recapture rules apply, they are a concern for the payor of the alimony, not the recipient. Alimony recapture is a provision by the IRS meant to prevent a divorcing couple from disguising a property settlement as alimony to achieve tax benefits. The rules aim to recapture taxes for what was classified as alimony - and therefore previously deducted from the income of the payor spouse - but was actually part of a property settlement. This usually occurs when there is a decrease or cessation of alimony payments within the first three calendar years.
If recapture applies, the payor has to include in his or her income the excess alimony payments that were previously deducted. The recipient of the alimony, on the other hand, is on the opposite side of the transaction. According to the IRS, if the recapture rules apply, the recipient may be able to deduct the recaptured amount from his or her gross income. This deduction usually happens in the third year after the alimony is first treated as such on tax returns. Therefore, the correct answer to the student's question would be option 1: The recipient decreases his or her Adjusted Gross Income (AGI) by a portion of the amount included in gross income as alimony in a prior year or years.
It's important to note that alimony recapture does not apply in all cases and is dependent on the specific amounts and timing of the alimony payments. Additionally, the tax laws regarding alimony have undergone changes, such as those coming from the Tax Cuts and Jobs Act (TCJA) that apply to divorces finalized after December 31, 2018, where alimony is no longer deductible by the payor nor includable in the income of the recipient for federal tax purposes. It's always advisable to consult a tax professional to understand how these rules apply to your individual situation.