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The IRS Child Contingency Rule Unplugged

To be certain that alimony remains deductible throughout the payment term, the payments cannot run afoul of the Child Contingency Regulations. IRS Code Section 71(c)(2) states “if any amount of alimony specified in the divorce decree is reduced (a) upon the happening of any contingency related to the child or (b) at a time that can clearly be associated with a contingency related to a child, then the amount of the reduction will be treated as child support, rather than alimony, from the start.” In temporary regulation 1.71-1T(c), Q&A 17, the IRS provides examples of child contingency events. They include the child's attaining a specified age or income level, dying, marrying, leaving school, leaving the spouse's household, or gaining employment. So, provision (a) is clear that if alimony decreases upon the happening of any one of the above contingencies, the reduction will be deemed as being nondeductible child support for its entire term. To address provision (b) above, the regulations provide two situations where reductions are presumed to be “associated with” the contingency related to a child (temporary regulation 1.71-1T(c), Q&A 18):

The first situation occurs when the payments are to be reduced not more than 6 months before or after the date the child is to attain the age of 18, 21, or State’s age of majority. Let’s take an example of where Sue and Bob’s son, Dan, was born on April 5, 1991. Bob is to pay Sue $2,000 a month in alimony until January, 2009, when the payments will be decreased to $1,000 per month. Dan will be 18 (Majority age) on April 5, 2009. Looking back and ahead six months from that date, any reduction of the alimony within the period October 5, 2008 and October 5, 2009, would constitute child support and not alimony. Thus, only $1,000 of the $2,000 payment will qualify as deductible alimony.

The second situation is where a reduction occurs on two or more occasions and these reductions occur not more than one year prior or subsequent to the spouse’s child attaining a certain age between ages 18 and 24, inclusive (an example may help!): Mark is to pay Debbie $2,000 a month in alimony. They have two children, Mike born on February 1 and Dee born on August 1. The payment will be reduced to $1,500 per month on May 1, 2007 and $1,000 per month on May 1, 2011. May 1, 2007 is less than one year after Mike turns 20 and 3 months. May 1, 2011, when the second reduction occurs, is less than one year after Dee will be 21 years and 8 months old. Under these facts, it is presumed that $1,000 of the payments constitutes child support, rather than alimony. Both reductions occur not more than one year before or after each child reaches age 21 (note that the age must be the same for each child; however not necessarily in whole years).

The good news is that the Regulation stipulates that “in all other situations, reductions in payments will not be treated as clearly associated with the happening of a contingency relating to a child of the payor.” Allocating support payments between child support and alimony is one of many tax-planning opportunities in divorce, but the structure must be done with great care.

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