Unallocated Support in an Illinois Divorce

 Posted on August 16, 2017 in Divorce

The issue of taxes is often a difficult one during a divorce. Taxes may become especially challenging if both spousal and child support are ordered to be paid by the same party. However, Illinois permits what is referred to as unallocated support or separate maintenance, which can greatly lessen a paying parent’s tax bill while ensuring that their obligations are still met. If you are in a precarious financial situation, it may be to your benefit to learn more about unallocated support.

Tax Burdens on Support Payments

Under federal law, child support payments are not taxable income for their recipient parent, nor are they tax deductible for the paying parent. This is due, in large part, to the fact that federal tax law permits one parent to claim the child or children as dependents for other tax credits. Spousal maintenance payments, however, are deductible by the payer and taxable as income for the recipient. This can create a tax disparity for the payer, because very often, child support in Illinois will total much more than the amount of spousal maintenance.

For example, if a couple with two children divorces, and the court holds that the husband should pay the wife 10 percent of his net income as maintenance and an amount equal to28 percent of his income as child support, the husband’s total obligations would be 38 percent of his net income. However, only 10 percent is tax deductible, which can put the husband in a difficult position, especially if he has other tax obligations.

How Separate Maintenance Saves Money

In order to save both you and your spouse money, it is integral that you have an attorney who understands the tax ramifications of the situation. It is legal for one spouse to pay the other a lump sum and classify it as separate maintenance or unallocated support, but the paperwork must be in proper order. If mistakes are made, the Internal Revenue Service may not grant you the deductions you are looking for, which means your tax bill will remain quite high. Also, unallocated maintenance must be approved by the court before your dissolution of marriage takes effect; the law prohibits this if done post-decree. Keep in mind that a court cannot and will not order unallocated support on its own, though it may approve such an agreement between the spouses.

The way for both spouses to benefit from adopting the policy of separate maintenance or unallocated support requires a few select criteria. In the example above, the husband was obligated to pay 38 percent of his net income in spousal and child support. If a settlement is agreed upon wherein he pays slightly more (to cover up-front expenses), the trade-off is then that he should be able to deduct the entire 38 percent from his taxes, rather than only the 10 percent dedicated to spousal support. Since maintenance is unallocated in this example, it is not classed as child support, which means it may be deductible.

Get Your Questions Answered

If you are encountering difficulties hammering out a support settlement, unallocated maintenance may be a solution. However, it can be complex to ensure that your agreement is compliant with all applicable U.S. tax laws. Contact an experienced DuPage County family law attorney to get the help you need with your case. Call 630-352-2240 for a confidential consultation today.

Sources:

https://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Filing-Requirements,-Status,-Dependents,-Exemptions/Dependents-&-Exemptions/Dependents-&-Exemptions-6

http://www.ilga.gov/legislation/ilcs/documents/075000050k504.htm