Maintenance may be also be appropriate in cases involving minor children. In those cases, the courts will almost always demand that a Judgment of Dissolution of Marriage provide for the payment of child support to the custodial parent. Unallocated support is a creative way to combine the payment of child support and maintenance into a single payment that can have significant tax benefits for both parties.
Unallocated support takes advantage of the provisions of the Internal Revenue Code, which presumes that “alimony” (which is referred to as “maintenance” under Illinois law) is tax-deductible to the party making maintenance payments. The IRS treats maintenance received as taxable income to the spouse receiving maintenance payments. Conversely, the IRS does not allow the paying spouse to treat child support payments as tax-deductible, and child support payments are never considered taxable income to the recipient.
In certain circumstances, it may be beneficial for everyone involved to combine child support and maintenance into a single, monthly unallocated support payment. This is typically the case where the spouse paying maintenance and child support has a substantial income, and the spouse receiving maintenance and child support has little-to-no income. The IRS permits the spouse paying unallocated support to treat the entire amount paid as “alimony.” As a result, the spouse paying unallocated support is permitted to treat the entire payment as tax-deductible. Similarly, the IRS would require the spouse receiving unallocated support to pay income taxes on the entire amount received.
The reason that unallocated support may be beneficial to both parties is that it allows the parties to shift income from higher tax brackets to lower tax brackets. That means that in certain cases, after considering all tax consequences, payment of unallocated support (instead of separate maintenance and child support payments) may leave both parties with more disposable income at the end of the year.
It is worthy to note that the court does not have the authority to order unallocated support in the absence of agreement of both parties. It is therefore important to hire an attorney who understands how unallocated support works, and how to use it as a settlement tool to maximize your post-divorce financial well-being.
Since unallocated support combines maintenance and child support, recent case law has placed tighter restrictions on the ability to make unallocated support terminating after a fixed duration, even when done so by agreement. Because child support consists of a public policy component, a party receiving support does not necessarily have the ability to contract away the rights of a child. Accordingly, if an agreement labels unallocated support as non-modifiable, a spouse can easily later challenge the provision as unenforceable.
Because unallocated support is only beneficial in certain situations, and because the IRS has strict guidelines for support payments to qualify and avoid tax penalties, only an experienced lawyer should provide guidance as to whether unallocated support is appropriate for your case. The attorneys at Kollias & Giese, P.C. can assess your circumstances to determine whether unallocated support is a good option for you.