Is It Deductible Maintenance or Non Deductible Child Support?

The State of Minnesota has recently pushed the IRS regulations used to define what is really alimony/maintenance and what is child support. This is important as alimony/maintenance is deductible by the payer and child support is not deductible. Admittedly, alimony/maintenance is included in the recipient’s income, but quite often, the recipient’s tax rate is lower and thus generates less tax for the state. The issue may also come up because the parties to the divorce do not agree to the proper tax treatment and take opposite positions, thereby putting the state into a “whipsaw” position.

Temp. Treas. Reg. 1.71-1T establishes a presumption that if payments otherwise designated as alimony/maintenance are reduced upon the happening of a contingency related to a child, the payments are child support, not deductible alimony/maintenance. This presumption can be overcome by showing that the reduction in the alimony payment, even though occurring at times close to an event like a child’s attainment of a certain age, is in fact, related to another event.

“The presumption in the two situations described above that payments are to be reduced at a time clearly associated with the happening of a contingency relating to a child of the payor may be rebutted (either by the Service or by taxpayers) by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to the children of the payor.” Temp Reg. 1.71-1T, Answer18

The state may be pushing these regulations beyond a reasonable interpretation. In a recent case, a family court judge made a very clear and detailed calculation that a reduction in alimony/maintenance was the result of a spouse improving her ability to earn income, and stated that the reduction had nothing to do with the children attaining the age of emancipation. Still, in an audit, the state concluded that because the reduction occurred within one year of the emancipation of the children, the amount of the reduction was child support and not deductible alimony/maintenance.

If you are a party to, or an attorney representing a client in, a divorce action, and alimony/ maintenance and child support are involved, make sure your agreement and the court order very clearly provide the basis for any reduction in alimony/maintenance. You may also include an agreement between the parties as to the tax treatment of the payments and consequences if the IRS or the state do not recognize the negotiated tax treatment. The IRS and state are not required to follow the tax treatment agreed to in the family court action.