How Can Unallocated Support Help Me?

 Posted on June 28, 2018 in Spousal Maintenance

In many Illinois divorces, both child support and spousal maintenance may be awarded by the court. If this does happen in your case, however, the tax implications can be prohibitive. If it is possible, you may be able to help shift that burden using what Illinois calls unallocated support. While it is not always possible to use this mechanic, sometimes it can make a significant difference, especially for custodial parents.

Current Tax Law

Under current tax law, spousal support counts as taxable income for the recipient, and as deductible for the payor. Conversely, child support is neither deductible nor taxable. In many divorce cases, one spouse makes significantly more money than the other, and thus, any tax deduction that they are able to obtain can be very welcome. In order to get the benefit of the deduction and the lower tax rate, some couples may be able to treat spousal and child support as one lump sum referred to as unallocated.

If this setup is possible, the richer spouse will get the tax deduction, while the less affluent parent will be taxed on support at a lower rate than they might be otherwise (since the amount will be larger). This way, the entire amount will be treated as ‘alimony’ under Internal Revenue Service (IRS) guidelines, enabling the lower rate of taxation that the recipient custodial parent will generally receive. It is important to keep in mind, however, that the same amount is generally allocated for child support (even if not referred to as such), as under Illinois law the right of support is the child’s, not the parent’s to bargain away.

Modifications Coming in 2019

If this is a state of affairs that may benefit you and your family, be advised that 2018 is the last time you will be able to structure a settlement in this manner. The tax law reform passed earlier this year eliminates all alimony deductions for divorce agreements executed after December 2018. This effectively removes the incentive to structure payments as unallocated support, because without the tax deduction, there is no incentive for the richer spouse to allow the other to get the lower tax rate.

If you still wish to use this type of settlement, be advised that it is important to ensure your divorce attorney is well versed in this type of law. While unallocated support structures are not illegal, you may be faced with requests to restructure or confusion from the IRS given that the actual term ‘unallocated support’ is somewhat unusual outside of the Midwest. Your attorney should be able to draft your agreement in a manner that will appease both the IRS and your bottom line.

Call Our Experienced Attorneys

Divorce can mean a significant financial restructuring for both spouses. If you have any questions, contacting one of our talented DuPage County divorce attorneys at Kathryn L. Harry & Associates, P.C. may be of assistance. Reach out to our offices today to set up an appointment.

Sources:

https://www.irs.gov/taxtopics/tc452

https://www.wsj.com/livecoverage/tax-bill-2017/card/1513379555