Unallocated Support Lawyers – Chicago
Serving Cook, Will, Du Page & Lake Counties
What is unallocated support?
A simple method exists for shifting tax burdens from a high-tax bracket parent to a low-tax bracket parent in divorce cases. The result is the possibility for extra after-tax cash for both parents and a tangible reinforcement of the concept that divorced couples can and should work together for their mutual benefit.
Lets start with the basics, it should be remembered that child support payments are tax neutral. They are neither deductible by the payer nor includable in income for the payee. Maintenance, on the other hand, is deductible by the payer and taxable to the payee. Unallocated family support is a label which can be applied to the combination of child support and maintenance payments which makes the entire payment deductible by the payer and taxable to the payee. The benefit of this arrangement is that the payer, commonly the higher income party of the family, can often use the extra deductions and the recipient of the support funds can pay the tax on the funds at a lower rate of tax with a net benefit to the two parties.
Unallocated support is an arrangement whereby child support and maintenance are blended into one payment. The award amount is fully tax deductible by the payor and is fully included in the income of the recipient’s spouse. This arrangement can be very attractive to the payor of the child support due to the tax deduction. Normally child support payments are non deductible on tax returns. In addition, the recipient of this support will normally agree to this arrangement if the awarded spouse receives additional support to cover the possible additional tax liability.
Everyone has heard of child support and alimony, however few have heard of “unallocated support.” Unallocated support can be a useful tool to solve complex divorce settlements. Unallocated support allows spouses to take support payments that are typically not tax deductible and allows the payer to deduct the payments from his or her income taxes.
So while alimony has always been treated this way, child support is usually not tax deductible. Unallocated support (sometimes called “family support”) allows you to combine child support and alimony together so that the entire payment of both becomes a tax deduction to the payer and the recipient must pay taxes on the support.
For both parties to benefit, the key to unallocated support is setting it so that both spouses benefit by the combining of two different types of support together. In addition, it is important to draft provisions that will satisfy the IRS and or their client’s accountant(s).
As you can imagine, this area of the law can be complex and it is best to consult with an experienced divorce and family law attorney for help.
Contact an Unallocated Family Support Attorney
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