Although most people are familiar with child support and alimony, there is a third category of support that you may not be familiar with; unallocated family support (UFS). It is a combination of child support and alimony, but receives the same tax treatment of alimony.
Labelling payments unallocated family support is a helpful technique for families where one spouse makes a significant income and the receiving spouse has little or no income. It is only used when the family has children, and is not suggested if the children are approaching emancipation. When this type of support is properly designated, it is treated the same as alimony for income tax purposes, meaning it is fully deductible by the payer and taxable income to the recipient.
The most likely scenario when UFS makes sense is when one parent is a high wage earner, and the other parent has little or no income. Imagine a father making $200,000.00 per year, and mom stays home with the children. In this example, dad is paying a lot of money in taxes. Since mom does not work outside the home, she has zero tax liability.
By combining child support and spousal support payments under the label of UFS, the support mom receives is taxable to her, but fully deductible by dad.
You may be thinking why would mom go for this, when some of her support would be child support and not taxable income to her? Simply put because transferring a portion of the families tax liability from the high wage earner to the low or no wage earner can actually create more available income to both individuals. Is this smoke and mirrors or some type of magic? No, just our wonderful tax code at work.
Determining which type of support would be the most beneficial for your family involves an analysis of many factors. Attorney Renee Lazar understands the dynamics that impact support orders and works with clients to create a support plan that will work today and in the future. She counsels clients on the advantages and risks of each type of support and works with you to create agreements which allow for the greatest financial benefit to you, our client, and your family.
Should you be in the midst of a divorce or contemplating divorce, contact the Law Offices of Renee Lazar either through email or telephone 978-844-4095 to schedule a FREE one hour no obligation consultation.