Veralynn Morris, CDFA, LUTCF
As Published in “Divorce Magazine”
Reclassification of Alimony: “The Child Contingency Rule”
Internal Revenue Service Publication 504 warns that if there is a child-related event, where alimony payments are reduced or end around the same time as the child-related event, that all alimony payments that were deductible to the Payor and taxable income to the Payee, may be reclassified as child support instead of alimony. The Payor will lose the deduction and pay tax and the Payee’s shall receive a refund of taxes paid.
Support payments that would have qualified as alimony may be treated as child support, says the IRS, “to the extent that the payment is reduced or eliminated either on the happening of a contingency relating to the child; or, at a time that can be clearly associated with the contingency.” A contingency relates to your child if it depends on any event relating to that child whether the event is certain or likely to occur. Events relating to the child include the child reaching a specified age or income level, graduating from high school, becoming employed, dying, leaving the household, leaving school, or marrying. The reclassification may occur if alimony payments are: 1. reduced not more than 6 months before or after the date the child will reach 18, 21, or the local age of majority; 2. The payments are to be reduced on two or more occasions (applies when there are 2 or more children) that occur not more than 1 year before or after a different one of your children reaches a “certain age” from 18 to 24 when the age is that of the oldest child when the first step down reduction occurs. The age must be the same for each child and can be less than a whole number of years.
IRS penalties may be avoided if you establish that any reduction in alimony was determined independently of a child-related contingency or that the duration or any step down is a ‘rule of thumb’ as a generally-accepted practice in your State.