by Bob Rywick
To the extent that a payment under a divorce or separation instrument is fixed or treated as fixed as support for a child of the payor spouse, it will not be treated as alimony.
Thus, such a payment is not deductible by the payor or included in the gross income of the payee. This rule is not limited to payments made for the support of minor children. It also applies if the payor is obligated under the divorce or separation agreement to pay a fixed amount of child support to the payee spouse until their child graduates from college, even if the child is 20 or older while attending college. The child support payment does not become alimony simply because the payments are made after the child reaches the age of majority.
When a payment under a divorce or separation instrument is fixed for child support. An amount is fixed by a divorce or separation instrument if the instrument designates a specific amount of money or a part of a payment to be child support. The amount or part that is fixed for child support may fluctuate.
Example 1: A separation agreement executed in 1999 provided that your client has to pay his former wife $2,000 a month for life, with that amount to be adjusted annually to reflect changes in the cost of living index. The agreement also states that 40 percent of each payment for 10 years is for child support. As a result of the inflation adjustment, your client must pay his former wife $2,200 each month in 2004. Of this amount, $880 (40 percent of $2,200) is treated as paid for child support.
A sum can be fixed by separately identifying an expense to be paid as being made for a child. Thus, where miscellaneous expenses that a taxpayer was required to pay under a temporary divorce order were specifically identified as for the repair of a child’s trombone, graduation expenses and dental work, those amounts were fixed as child support.
Amounts fixed for child support include specific child support-related expenses that the spouse is required to pay, even if the applicable order doesn’t specify the amounts to be paid for those expenses. Where, in addition to requiring general child support payments, the order also required the taxpayer to pay his children’s tuition expenses, the payment of those expenses was a payment of child support.
However, designating payments as “family support payments” in a divorce agreement didn’t cause the payments to be treated as child support where the payments weren’t otherwise fixed for the support of the children. Also, where a court decree required a husband to pay an amount for the support of the spouse and one child (an amount that was not allocated under then applicable state law), no part of that amount was fixed for child support.
When a payment under a divorce or separation instrument is treated as fixed for child support. Even if an instrument does not specifically provide that part of a payment is for child support, part will be treated as child support to the extent that the payment is to be reduced on the happening of a contingency specified in the instrument relating to a child.
Examples of such contingencies include the child’s attaining a specific age or income level, marrying, dying, leaving school, leaving the spouse’s household or gaining employment. A reduction at a time that can clearly be associated with such a contingency will have the same effect.
Example 2: Under a divorce decree, your client is required to pay her husband $5,000 a month for support. The payments meet all the requirements to qualify as deductible alimony. However, the decree states that the payments are to be reduced to $4,000 a month when their oldest child reaches 18 and to $3,000 a month when their other child reaches 18.
Also, if either child dies before 18, the monthly payment will be reduced by $1,000. Under these facts, $2,000 of the $5,000 monthly payment is treated as fixed for child support.
Example 3: Your client was required to pay the rent on his ex-wife’s apartment. However, if their son lived with your client for more than half of a year, he was required to pay only one-half of the total rent for that year. Under these facts, half of the amount paid for rent is treated as fixed for support.
In the following situations, payments that would otherwise qualify as alimony will be presumed to be reduced at a time clearly associated with the occurrence of a contingency relating to a child of the payor (in all other situations, payment reductions will not be so treated):
1. Where the payments are reduced not more than six months before or after the date the child is to reach the age of 18, 21 or the local age of majority.
2. Where the payments are to be reduced on two or more occasions that occur not more than one year before or after a different child of the payor reaches a certain age between 18 and 24, inclusive. This certain age must be the same for each such child, but need not be a whole number of years.
Example 4: Your client and his wife were divorced on April 1, 2004. At that time their two children were 16 and 13 respectively. (Their oldest was born on May 15, 1987, and their youngest was born on July 20, 1990.) Under the divorce decree, your client has to make payments to his ex-wife of $5,000 a month. The monthly payment is to be reduced to $3,500 on Jan. 1, 2008, the date their oldest child will be 20 years, six months and 17 days old. The payment will be further reduced to $2,000 on Jan. 1, 2011, the date their youngest child will be 20 years, five months and 12 days old.
Under the presumption in No. 1, above, only the first reduction would be treated as causing the amount of the reduction to be treated as child support, since the reduction occurs less than six months before that oldest child becomes 21. The second reduction would not be so treated under No. 1, since it occurs more than six months before the youngest child becomes 21.
However, under the presumption in No. 2, above, both reductions would be treated as causing the amounts of the reductions to be treated as child support, since each reduction occurs less than a year before one of the children reaches the age of 21 (or less than a year after one of them reaches 20).
Thus, unless the presumption is rebutted, payments under the divorce decree equal to the sum of the reductions ($3,000 a month) will be treated as fixed for child support.
The above presumption may be rebutted by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to the payor’s children. For example, it may be rebutted by showing that alimony payments are to be made for a period customarily provided in the local jurisdiction, such as a period equal to one-half the duration of the marriage.
Effect of designating an amount agreed on as child support as alimony. The parties can make the support payments deductible by the payor and taxable to the payee by designating as alimony a payment that includes the amount agreed on for child support. For example, a higher-bracket payor might offer the payee better terms if the payor could deduct the payment as alimony.
If the parties want this result, it is not enough to avoid specifying, in the divorce or separation instrument, the amount of the payment to be treated as child support. They must also avoid contingent arrangements in the divorce or separation instrument that may result in having an amount treated as child support even if the instrument does not specifically provide that the amount is for child support.
Payments are treated as made for child support before being made for alimony. Where an instrument specifies an amount for alimony and an amount for child support, and the payor spouse pays an amount not above the child support amount, the payment will be treated entirely as child support.
Example 4: Their separation agreement requires your client’s former husband to pay her $20,000 a year as alimony, and $15,000 a year for child support. If he pays only $15,000 (or less) in any year, the entire amount paid will be treated as child support. If he pays her $25,000 in a year, $15,000 will be treated as for child support and $10,000 will be treated as paid for alimony.
Bob Rywick is an executive editor at RIA, in New York, and an estate planning attorney.
