Warning! Don’t Violate the Child Contingency Rule!
In a divorce decree, if any amount of specified money becomes reduced:
- Upon the happening of any contingency related to the child or
- 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
- 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.