October 2015 : Overview of Unallocated Family Support Payments

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Tax Benefit

• Combined payments of spousal support and child support – referred to as “family support” – are taxable/deductible under IRC Section 71.
• Family support is advantageous from a tax standpoint if the support payer (assume H) is in a significantly higher tax bracket than the payee (W).
• By structuring payments as family support, the child support component – which is generally nontaxable/nondeductible – is converted to taxable/deductible.
• However, so W is not short-changed, the child support component of the family support payment must be in- creased to cover the tax thereon.
• To illustrate:
  • H’s average combined federal and state tax bracket is 40% and W’s is 20%.
  • In their divorce settlement, spousal support is $2,500 a month and child support is $1,000.
  • After-tax, the payments are as follows:
    (Table in PDF file)
  • If the child support component is increased to $1,450 and included with spousal support as $3,950 family support, the result is:
    (Table in PDF file)
  • So, by converting child support to family support, Uncle Sam kicks in $3,420 a year, split approximately evenly between H and W.

Requirements to Qualify as Family Support
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Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)