Tax Treatment of Child Support

The rules for the tax treatment of child support payments and receipts under Internal Revenue Code 71 are fairly straightforward. Payments are not includible in the gross income of the recipient parent. Similarly, there is no tax deduction for the payor parent. In fact, there is no deduction of any type for child support payments.

To help determine whether payments qualify as child support deductions, ask yourself:

• Are payments required by a child support order or divorce decree
• Are payments intended to be or actually used for child support
• Are child support payments subject to contingencies

When is a Payment for Child Support?

Generally, a payment is for child support if a divorce decree or other agreement fixes, or specifically designates, all or part of a payment as being for the support of the payor's child.

Any description indicating that an amount is for child support, or for a child-related expense, will render it nondeductible to the payor and nontaxable to the recipient.

There are several circumstances that can influence the determination of whether a payment is for child support.

Contingencies

Contingencies are events that might or might not happen. With respect to spousal payments, contingencies can include events such as the marriage of the child, the child's entrance into college, or the child's attainment of a certain age. How do contingencies impact child support payments? A payment is treated as child support if the payment is reduced:

• On the happening of a contingency specified in the divorce decree or child support order, or
• At a time that can clearly be associated with the happening of a contingency

For Example: A divorce decree obligates H to pay $1,600 in "family support" for W and their two minor children A and B. None of the payments are designated as child support. The amount paid is to be reduced by $300 per month when each child reaches the age of 18, marries, or dies. The support is to be reduced by $1,000 if W remarries. Because a reduction of up to $600 per month can occur based on a contingency relating to a child of the payor, $600 per month of the payments will be treated as child support, and only $1,000 will be treated as alimony.

Critical, here, is the true nature of the contingency: is it really related to the child? The reduction of spousal support in the event of increased child support does not turn spousal support into child support because the contingency does not relate to the child.

Presumptive Contingencies

IRS Regulation 1.71-1T states two rebuttable contingencies where payments that otherwise qualify as alimony or maintenance are presumed to be reduced at a time that can be clearly associated with the happening of a contingency, and are thus nondeductible by the payor spouse and nontaxable to the recipient spouse. They are:

• If there is a reduction within the six-month period before or after the child reaches the age of 18 or 21, or the local age of majority, and
• When the parties have two or more children and support payments are reduced more than once

To rebut these presumptions, it must be shown:

• That the reduction was independent of any child-related contingency, or
• That alimony payments are set for a period that is customary in the local jurisdiction, or
• Regarding the first presumption, that the reduction is a complete cessation of alimony during the sixth post-separation year

For Example: A divorce decree provides that H will pay W $2,000 per month, with no specific amount designated as child support. H and W have two minor children, B and G. The monthly payments will be reduced by $600 per month on a designated date in Year 8 and by another $600 per month on a designated date in Year 10. Those designated dates are eight months after B reaches age 18 and 10 months after G reaches age 19. Of the total payments, $1,200 per month are presumed to be child support. The second presumption comes into play when a reduction in support occurs within a year before or after two different children reach the same age. In this example, the reductions occur seven months before B reaches the age of 19 years and three months, and seven months after G reaches that same age. As a result, the reductions are presumed to be child support. If the reductions occurred, for example, more than six months before B reached 18 and after G reached 20, the payments would not be presumed to be child support.

It can be tricky to devise a plan to have child support payments treated as alimony or maintenance. At the very least, make certain that the termination date for spousal support does not trigger an IRS presumption. A tax attorney, or an attorney seasoned in child support matters, can help you find creative strategies for deducting such payments.

Arrearages

Arrearages can impact the tax treatment of payments and receipts. How? If a payor's yearly payments are less than the amount required by the parties' agreement, payments are allocated first to child support. Only after the required child support is paid may amounts be allocated to alimony or maintenance.

Ready to Proceed?

As you can see, despite the seemingly straight-forward IRS rules governing the tax treatment of child support payments, there are a myriad of variables that can have a direct impact on their taxability. You need to be careful to ensure that your deductions for payments are proper and that you properly include or exclude receipts from your gross income.

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