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What is FAMILY SUPPORT?

Q. My lawyer mentioned something called "family support" as a way to possibly get more money from my ex-husband for child and spousal support. What exactly is family support and does it work?


A. Family Support is mentioned in two California Family Statutes - section 92 and section 4066.

In theory family support allows parties, by agreement, to characterize both child support and spousal support together. The spousal and child support components are unallocated, and the total sum is a combined number.

The purpose of family support is to create a deductibility for child support for federal and state income tax purposes that otherwise does not exist. One hundred percent of family support is potentially deductible by the payee and must be picked up as taxable income by the recipient. However, as mentioned at the bottom of this blog, there is some uncertainty whether the IRS will in fact allow this deduction.

While this may seem to be a bad deal for the supported spouse, this is not at all true in certain circumstances. If the supported spouse has no other taxable income, depending upon what the family support number is that person may pay little or no taxes on the combined sum while the payor obtains the benefits of total deductibility. If there are little adverse tax consequences to the party receiving family support but the party paying is substantially better off net after taxes, then family support is something divorcing spouses might want to horse-trade. Since the payor is receiving a benefit, they may well be willing to pay to the supported spouse a higher combined family support award than they would if it was broken down into deductible spousal support and non-deductible child support.

In this way, more money becomes available for both families - and particularly for children - and less money goes to the government.

One caveat - family support is clearly deductible for purposes of the California State Taxes. However, at least one federal tax court decision has invalidated a family support order in terms of its deductibility (Wells v. Commissioner). In that case mistakes were made in the drafting of the family support provision in that it was not stated that support would terminate upon the death of the payee (a requirement for deductible spousal support) and, more important, the cessation of payments was contingent upon events which were associated with the parties' children (i.e., turning 18 or graduating high school) - another major no-no for securing deductible alimony. I have separately blogged deductibility of spousal support.

In order for family support to be deductable for IRS purposes (IRC section 71), it needs to not be disguised child support. This means its payment or continuing existence cannot be tied to any child related event - it will be disallowed if the Judgment or other support instrument links it cessation or modification to the children becoming majors, or dying, for instance. With careful drafting, you can achieve something that likely will past IRS muster but you'd be well advised to not write these provisions yourself unless you are an experienced family law/tax attorney!

Hence, before agreeing to family support (particularly if you are the payor, since if you are the payee you may find you actually had no tax liability after all and so the recipient may not be hurt while the payor is) you need to ask your lawyer or a tax accountant for their opinion on the current deductibility of family support, and you need to be sure the agreement is carefully drafted - including a provision that allows the parties some remedy if, for instance, the recipient fails to report the family support as income or if the deduction comes to be disallowed.

Since family support is a dicey proposition, it probably should not be considered until the IRS has given clearer directions that protect you.

What more information about taxable spousal support?

Thurman W. Arnold


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