What is "unallocated" family support?

 

Everyone has heard of child support and alimony, however few know the secrets behind what we divorce professionals call "unallocated support." Unallocated support is a very useful way to settle support issues in a divorce case, when settlement seems to be elusive. 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 mush 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.

 

The trick is moving money from one spouse (that's in a higher tax-bracket) to the spouse (that's in a lower tax-bracket).  This shift takes money and taxes it at a lower rate.  This tax savings is then distributed to both spouses by setting support in a way where the payer doesn't mind paying more that he or she should, because after taking the deduction, they are actually paying less than had the alimony and child support been paid separately.  Similarly, the recipient of support doesn't mind paying taxes on the unallocated support because even after paying taxes, they receive more money than had they been receiving child support and alimony separately.  

 

Naturally, the real secret to unallocated support is setting it properly so that both spouses benefit by the mushing of two different types of support together, and many lawyers forget to draft provisions that would satisfy the IRS and or their client's accountant.  

 

Sometimes the IRS and accountants have issue with unallocated support. It's not that it's illegal; rather, it's simply a problem because divorce lawyers don't know how to draft the provisions that would satisfy IRS rules and accurately note to an accountant what is really going on. Hopefully this article will help.

 

By and large, the problem stems from the use of the term "unallocated support."  The term unallocated support is a creation of Illinois lawyers and Judges.  I've been practicing divorce for many years now, and still do not understand why so many refer to this type of support in the way that they do.  It should be properly identified as "separate maintenance."  That way, both the IRS and your accountant will know what it actually means.  Both will understand that the payer takes the deduction and the recipient pays the taxes.  Calling it family support and or unallocated support is needlessly confusing to everyone - everyone but old school Judges and lawyers.  

 

Other common pitfalls with unallocated support is the proper setting of the amount, so that both spouses benefit (as opposed to only one spouse benefiting from the tax treatment) and not know when to use unallocated support (some lawyers think unallocated support should be utilized in every case - which is not true).  You almost never want to use unallocated support in settlement when both spouses earn about the same amount of money.  In that case, there is no benefit by shifting tax-brackets as described above.  Additionally, you don't want to use unallocated support where one spouse doesn't earn much now, but it's anticipated that he or she will earn as much as the other parent in coming months.  Again, no benefit by shifting the tax bracket. 

 

If support is becoming an issue in your case (or is an issue already), consider looking at unallocated support options and seek out an attorney that really knows the ins and outs of this support mechanism.  It's a wonderful settlement tool, when used properly.

 

If you have any questions about this topic,
call Paul D. Nordini at (630) 416-6600
or email him at:  paul.nordini@divorceinfosite.com