The idea of one spouse paying the other spouse child support and/or maintenance upon divorce is a familiar topic for most people. These payments provide needed income for the spouse with a lower income, as well as the spouse who has custody of the children. However, under an alternate form of payment—unallocated support—both the paying spouse and receiving spouse can benefit.
What is Unallocated Support?
Through unallocated support, an individual pays an amount to a former spouse which represents the payment that would have to be made for maintenance and child support. However, the payment does not specifically allocate between what is child support and what is maintenance (hence, the name unallocated support). This difference can have important tax implications in certain circumstances.
Child support is not tax deductible by the payor. Therefore, the individual paying support cannot deduct that amount from his or her income taxes. With unallocated support payments, the entire payment amount is deductible from the taxable income of the payor. As a result of this, in situations where the paying spouse is in a higher tax bracket than the receiving spouse, significant tax savings can be realized by using unallocated support.
Due to the tax savings, the individual paying support may end up with more money than he or she would have, had maintenance and child support payments been made separately. Further, it is also possible that the receiving spouse (and children) will also benefit from an increased payment amount than if they had received maintenance and child support separately.
How Does it Work?
Unallocated support takes money from a higher income tax bracket and moves it to a lower tax bracket. The way to maximize the tax savings with unallocated support work is for the payor to pay more than he or she is required under the maintenance and child support guidelines. Typically, the payor will ultimately end up keeping more of his or her money because of the ability to use the entire unallocated support payment as a tax deduction.
At the same time, this increased support payment is beneficial to the recipient as well. Although the payment received will be taxed, if the amount is set appropriately, the after-tax result will still be more than if the individual had received child support and maintenance as separate payments.
It is important to ensure that an unallocated support payment is set in such a way as to be an incentive to both the payor and the recipient. For the most part, former spouses who earn similar incomes will not find unallocated support advantageous. However, should any changes occur in the incomes of either party, unallocated support can always be modified. Additionally, because of the complexity of unallocated support, seeking legal advice from attorneys familiar with tax, as well as family, law is very important.
If you would like more information about unallocated support, or the divorce process generally, speak with an experienced Illinois family law attorney at MKFM Law today. Our firm can provide you with the representation you need to help you through the difficult process of divorce. Call (630) 665-7300 today.
