What Is Unallocated Support?

 Posted on December 08, 2017 in Child Support

During a divorce, there are some occasions when one spouse is ordered by the court to pay both spousal maintenance and child support. However, the financial burden created by such an arrangement can be painful, especially considering the income tax treatment of child support and spousal maintenance. Illinois law permits the parties, who reach a settlement agreement, to classify both kinds of support payments in such a way as to keep more money in the hands of the family due to tax savings. 

Tax Burden Differences

Under Illinois family law, spousal maintenance (called alimony in many other states) may be granted to a spouse in certain situations. For example, maintenance may be awarded to a spouse who has not been in the workforce for many years, or it may be awarded to a spouse who cannot live on his/her salary alone. The current law provides that the spouse who pays maintenance may deduct the payments from his/her taxable income, while the spouse who receives maintenance must include it in his/her taxable income. 

A custodial parent may also be entitled to child support under the current income shares law.  Child support payments are not deductible by the payor or includible in the payee’s taxable income.  Child support is tax neutral. In other words, the tax burden is not shifted to one party or the other. 

Helping Both Parties

Rather than treating child support and maintenance payments separately, Illinois law allows spouses to agree to characterize all support payments as “unallocated support”.  This is especially useful in situations where the payor spouse is in a much higher tax bracket than the recipient spouse because it shifts the burden of the tax liability to recipient spouse, resulting in a lower tax bill for the payor spouse.  In turn, a lower tax bill for the payor spouse means that there is more disposable income available to use for payment of support to the payee spouse. 

At first glance, unallocated support may appear to be unjust to the payor.  However, if used properly, characterizing support payments as unallocated means that more money stays in the pockets of the family, as a whole, and less money goes to the government in the form of tax payments.  Often times, the combined tax liability of the parties after the divorce is lower than the tax bill the parties might have otherwise had if they had not taken advantage of the unallocated support provisions in the settlement agreement. 

Some lawyers are leery of structuring their client’s divorce settlement in such a manner because they fear running afoul of the Internal Revenue Service.  Keep in mind, a settlement agreement can lawfully take advantage of the unallocated support payment provisions so long as it is drafted properly. Careful consideration must be given to the language used in the settlement agreement, the duration of the initial award of support, and the timing of any modifications to support due to a child turning 18 years of age and graduating from high school. 

Contact Our Family Law Attorneys in DuPage County

If you are considering a divorce and are concerned about your financial obligations, or have questions about unallocated support as it may apply to your particular situation, contact Kathryn L. Harry & Associates, P.C. today. Our experienced DuPage County family law attorneys will advise you as to the unallocated support options and many more provisions related to finances in divorce.     

Source:

https://www.isba.org/ibj/2015/09/solvingxyillinoisspousalmaintenance