Alimony, Child Support and Unallocated Support – What’s the Difference?

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By Christina Butcher,
KOS Manager cbutcher@koscpa.com

When navigating through the divorce process, three key words will appear – alimony, child support and unallocated support. It is essential to know what each of these words mean, and more importantly, how they impact your tax return.

Simply put, alimony is spousal support or maintenance. It is a court ordered payment from the spouse who earns the highest income to the other spouse. Alimony laws exist to help a spouse ease into life after divorce; it prevents the person from having to drastically lower his or her standard of living after a divorce. Financial situations in which both couples are employed usually do not merit spousal support payment.

When presiding over a divorce settlement and deciding whether to issue a court order for alimony, the judge will consider several factors such as the length of the marriage, the economic dependence of one spouse on the other, their respective ages and how well they conduct themselves in court. Alimony qualifies as a tax deduction to the spouse who pays it, while the person who receives alimony must pay taxes on it. Please note that alimony in itself can be a very complicated matter and your tax advisor should be consulted before making any decisions.

Unallocated support is a label placed when you combine child support and alimony. When combining these payments, the parent who pays can claim a deduction for all payments. The parent that receives the money must claim all amounts as income at the end of the tax year.

Unallocated support works when the recipient of the money does not work and usually has a very low income tax bracket. It is the difference between the tax brackets of the parents where the savings is found and divided by the spouses. The tax code prohibits an amount being fixed as child support being treated as alimony. Therefore, an unallocated sum intended for both spousal support and child support could be allowable as taxable/deductible alimony as does not “fix” an amount for child support.

Child support, on the other hand, is neither tax deductible to the person who pays it nor is it taxable to the person who receives it. Child support payments are not a transfer of taxable income from one spouse to the other since they are not paid for the direct benefit of the recipient spouse.

A portion fixed as child support may be stated directly in a divorce decree or separation agreement, or it may be inferred from the agreement’s terms. There are several pitfalls to be aware of when structuring alimony and support payments, specifically when the provision of the agreement provides for a reduction in the amount upon the happening of a specified event (such as a child attaining a specified age). Depending on the wording of the agreement, the entire amount of the payment can be reclassified as child support and therefore nondeductible by the payor as alimony.

Understanding the differences between alimony, child support, and unallocated support is just the starting point in structuring a divorce or separation agreement. Additional consideration must be given to who claims the dependency exemption, tuition credits, and property transfers to name a few. Should you find yourself in this situation and need assistance, please contact Christie Butcher cbutcher@koscpa.com or any other KOS professional at 847.580.4100. We would be happy to assist.