Peaceful Divorce

Warning! Don’t Violate the Child Contingency Rule!

In a divorce decree, if any amount of specified money becomes reduced:

  1. Upon the happening of any contingency related to the child or
  2. At a time that can be clearly associated with a contingency related to the child, then the amount of the reduction will be treated as child support, rather than alimony. 
    Code Sec. 71(c)(2). Reg. §1.71-1T(c)

What is a contingency?

A contingency is an event related to a child, regardless of whether the event is likely to occur. Some examples are:

  • Reaching age 18, 21, or the age of majority in their state
  • Marriage
  • Graduating from school
  • Leaving home
  • Joining the military
  • Getting a full-time job

Section 71 of the IRC provides two situations where payments would not qualify as alimony if they were reduced at a time clearly associated with a contingency relating to the child: 

1. Six-month rule  

The first situation occurs when payments are to be reduced not more than six months before or after the date on which the child reaches age 18, 21, or the age of majority in their state. This means all three ages!

2. Multiple reduction rule

The second situation happens when there are multiple children. In this instance, if payments are to be reduced on two or more occasions which occur not more than one year before or after each child reaches a certain age, then it is presumed that the amount of the reduction is child support. The age at which the reduction occurs must be between 18 and 24, inclusive, and must be the same for each of the children.

The following example shows what could happen when given wrong advice:

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 says “Josh is graduating from high school in 5 years, so why don’t I pay Karen maintenance for 5 years.” Or Kevin says, “Since Josh is graduating in 5 years, why don’t I 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 $60,000 that he will have to pay tax recapture on!

You can see how violating the Child Contingency Rule could have serious consequences. Be sure not to tie a reduction of maintenance to anything related to your children! Contact us if you have questions or concerns in regards to this issue.

Views: 21

Comment

You need to be a member of Peaceful Divorce to add comments!

Join Peaceful Divorce

Become an affiliate of the Happily Divorced! book and audio program! Let Reformed "Killer" Divorce Attorney, Cynthia Tiano, and Dr. Max Vogt, Marriage and Family Psychologist, take you on an adventure into the lives of two families going through the divorce legal system - one doing "legal battle" and the other creating a "peaceful divorce". Learn how to create a Win-Win from their experiences... HappilyDivorced.org


Events

Latest Activity

Robert D. Bordett, CFP, CDFA posted a blog post

How Important Is the Budget in Divorce Planning?

I think everyone’s least favorite word is BUDGET. Why don’t we want to hear that word? Think about it: We’re asking ourselves to do something we don’t want to do — or worse yet, someone else is asking us to do it. While we might not like them, having a budget does help. In divorce planning — whether you are going to litigation,…See More
Sep 18
Robert D. Bordett, CFP, CDFA posted a blog post

21st Century Parenting Plans

I remember when the default custody arrangement had one parent as the custodial parent, and the other parent was known as the “Disneyland parent.” They had their children every other weekend, and maybe once during the week for dinner. Today it is more common to see joint parenting time consist of one week on, and one week off or “two-two-five-five” time,…See More
Aug 15
Robert D. Bordett, CFP, CDFA posted a blog post

Including a Financial Professional in Your Mediation

Very often, couples who are divorcing amicably, or who have straightforward financial situations, will forgo meeting with a financial professional while they go through mediation. Though this may seem logical on its face, “going it alone” may result in unnecessary hardship and inaccurate calculations.  It is easy to simply look at a tax table today and say “I am going…See More
Jul 30
Robert D. Bordett, CFP, CDFA posted a blog post

What About the House?

Going through divorce means dealing with hundreds of details, some more important than others. One detail that merits extra contemplation is how to deal with the marital home.Does one spouse want to keep it because the children still live there? You don't want to disrupt their lives any more than is already happening. What if the children are grown? Do you still need that much of a house?Here are the three most common means of dealing with the house in divorce:Selling the house and dividing the…See More
Apr 24

Badge

Loading…

About

© 2019   Created by Cynthia Tiano, Esq..   Powered by

Badges  |  Report an Issue  |  Terms of Service