If any amount of alimony specified in the divorce decree is reduced upon the happening of any contingency related to the child, then the amount of the reduction will be treated as child support, rather than alimony, from the start.
The following example shows what many attorneys have incorrectly advised their clients to do.
Example: Kevin and Karen are getting divorced and their son, Josh, is going to live with Karen. Kevin is going to pay Karen $3,000 per month maintenance plus child support. Kevin’s attorney says, “Since Josh is graduating in 5 years, why don’t you pay Karen maintenance of $3,000 a month for 5 years and then reduce it to $2,000 a month for an extra 3 years. Karen won’t have as great a need when Josh leaves home.”
This is creating a serious tax problem for Kevin. The IRS may consider the reduction of $1,000 a month to be child support because it coincides with a child contingency. The IRS will then go after Kevin to collect the taxes he saved by calling it maintenance and they will make it retroactive from the beginning. Five years (60 months) times $1,000 is $72,000 that he will have to pay tax recapture on!
What is a contingency? A contingency relates to a child if it is dependent on an event relating to the child, regardless of whether the event is likely to occur. Some examples are:
- Reaches age 18, 21 or the age of majority in their state
- Gets married
- Graduates from school
- Leaves home
- Joins the military
- Gets a full-time job
Again, if the final divorce order says that alimony reduces or stops upon the event of any of the above contingencies, that will trigger the recapture of taxes.
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