Work Together and Share the Tax Benefit–Family Support

In the divorce process, spouses who can cooperate reap many financial benefits.  Unallocated family support is one such example.

Spousal support is deductible to payor spouse and taxable to the supported spouse.  Child support is neither deductible nor taxable.  In a typical case, the lower-earner has primary physical custody of the child or children and is receiving child support.  When there is a significant difference in income between spouses, it makes sense to try to “deduct” child support from the income on the tax return of the higher-earner (noncustodial parent), who is in the higher tax bracket, and to add child support as income to the tax return of the lower-earner (custodial parent), who is in the lower tax bracket.  The higher-earner will pay a lot less tax and the lower earner will pay a little more tax.  The net result to the parents exchanging child support is a reduction in taxes, a savings they can split.

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To accomplish this the support order must not fix the amount of child support but instead must award unallocated family support which includes unspecified amount of child support.  There are other requirements which the IRS strictly enforces, so this order must be drafted by an attorney.  When the order is properly drafted, the IRS will respect the parents’ choice to shift child support to the tax return of the lower-earner and both parents can share in the tax savings.

Judge Thomas Murphy wisely advises divorced parents that they must work together:

Family support is an income tax planning tool that should be considered in all dissolutions. Child support can still be disguised as spousal support as long as everyone follows the rules. When parents are in different tax brackets, a family support order almost always increases the “pot” of net income. The benefits are available to taxpayers at all income levels, as long as everyone involved in the case (the spouses, the attorneys, and the court) can work together.

2016 California Legal Forms Transaction Guide – ch 123 SPOUSAL AND CHILD SUPPORT PROVISIONS § 123.52 [2][d]

In every divorce, there are opportunities for a sharp legal mind to find ways to not just split the pie but actually make it bigger, as long as spouses are able to cooperate.  Cooperating during divorce is not easy, and we should not look down at those who can’t because they are in such emotional turmoil.  But with the help of a caring, sensitive, and smart divorce mediator, divorcing spouses can literally win-win as they separate their lives.

The Sane Divorce