If any amount of spousal support 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 be clearly associated with a contingency related to the child, then the amount of the reduction will be treated as child support, rather than spousal support, from the start.
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
Section 71 of the IRC provides two situations where payments would not qualify as spousal support if they are reduced at a time clearly associated with a contingency relating to the child.
The first situation occurs when the 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.
Multiple Reduction Rule
The second situation is when there is more than one child. In this instance, if the 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 the common mistakes made regarding child contingency.
Example: Kevin and Morgan are getting divorced and their son, Steve, is going to live with Morgan. Kevin is going to pay Morgan $3,000 per month spousal support plus child support. It’s recommended that Kevin pay Morgan support for 5 years to coincide with Steve graduating from high school in 5 years.
Another mistake would be to recommend that since Steve is graduating in 5 years, why doesn’t Kevin pay Morgan spousal support of $3,000 a month for 5 years and then reduce it to $2,000 a month for an extra 3 years. Morgan won’t have as great a need when Steve leaves home.
Either strategy is wrong and will create 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 seek to collect the taxes Kevin saved by calling it spousal support, making it retroactive from the beginning. Five years (60 months) times $1,000 equals $60,000 of additional taxable income.
Since the law covering taxation/deductibility of spousal support changed December 31, 2018, this rule only applies to cases finalized prior to 1/1/2019.