2018 note: The Tax Cuts and Jobs Act (TCJA) of late 2017 eliminates the deductibility of spousal support beginning in 2019 with new divorce agreements. This does away with the primary rationale underlying family support.
When divorcing spouses’ incomes differ by a very large amount (placing them in much different tax brackets) and both child support and spousal support are involved, the spouses can sometimes save significantly overall on their income taxes by designating the payments as “family support.” The tax savings can then be shared by the spouses, for their benefit and for the benefit of the family.
Here are the basics:
- Spousal support is tax deductible for the paying spouse and included as income on the recipient’s tax return (unless the spouses agree otherwise).
- Child support is not deductible for the payor nor is it included as income by the recipient.
- If the support is combined and called “family support” instead of child or spousal support, the entire amount can be deductible for the payer and included as income on the recipient’s tax return.
Recognition of Family Support by Tax Authorities
Family support is recognized in California by the Franchise Tax Board.
However in Federal Tax Court cases involving spousal support (which the IRS calls “alimony”), a recurrent theme is whether or not unallocated family support payments that are a combination of spousal support and child support constitute deductible spousal support instead of nondeductible child support. Cases have been decided both ways. A recent case, Delong v. Comm’r, T.C. Memo. 2013-70 (3/11/13), found in favor of the full deductibility of unallocated (family) support payments as alimony. The drafting of the family support provisions of your divorce is what is critical to not fall afoul of the IRS.
According to the IRS regulations, payments made to a spouse must meet certain requirements to be considered alimony. Additionally, in order to be tax deductible by the payor and taxable to the payee, certain requirements must be met to establish that the payments are not child support. Therefore, if all or a portion of the unallocated family support payment does not meet the requirements to be considered alimony, or if a portion of the payments are considered child support, that portion of the family support payment may not be deductible by the payor spouse.
If you think the tax savings of family support might justify the cost of drafting, get professional help because it takes expert advice and drafting to make it work. It must be worded very carefully or you can lose the tax advantage. At least one law firm in California will do this for you for about $500.