Divorces are messing things, and the finances involved just make things more tricky. Good divorce lawyers have a mastery of the IRS code, and being that I thought I would be a tax lawyer (at one time), it’s this knowledge that provides some edge. For most spouses, custody of children takes top priority, though finding out about financial support does take a close second place. Most typical forms of support are child support and alimony (though in many States, alimony is now called “maintenance”).
A third option when talking about support is un-allocated support. This form of support is when you take child support and alimony and mush them together so that you can’t tell which dollar goes toward one or the other. Hence, the title “un-allocated.” By mushing the dollars together, you create an interesting tax device that allows the parent that is paying the support a tax deduction for the entire amount he or she pays (whereas, child support is typically not a deduction), and the recipient of the support pays income taxes on the support received (where typically, child support does not have to be claimed as income – only alimony).
When using un-allocated support, the payor may be willing to pay more (and the recipient receive more) given the new-found tax savings. The mechanics that make it all special is that your taking income at the payor’s tax bracket and moving that money (in the form of support ) to the recipient’s tax bracket. The greater the difference between the tax brackets, the more you’re screwing the IRS out of tax money they would have otherwise received. It’s this money saved, that gets put on the table to settle a support problem. There are IRS rules to make this all work, but we can cover that in a later blog post.
It’s important, however, to know that this term “unallocated support” isn’t used by many, except those lawyers and judges in Illinois (and divorce professionals elsewhere). So, your tax person or CPA will not have a clue as to what you’re talking about. In that case, the proper IRS term for unallocated support is “separate maintenance” and your divorce papers should carefully note ALL of these terms along with providing what the intentions of the spouses by setting up support in this fashion.