At ICLE’s Community Zoom discussion on February 9, Michelle Gallagher from Adamy Valuation led a discussion with 35 participants about tax implications for child and spousal support. Below are some highlights:
- Determining income: Child support is always nontaxable to the recipient and nondeductible to the payor. Spousal support is not as straightforward. If the divorce happened from 2019 to today, it is nontaxable to the recipient and nondeductible to the payor. Before 2019, this depended on how the arrangements were made at the time of the divorce. Bonus income is considered net income (not gross income) if the agreement was after 2019 for the alimony. This could be different if the divorce was before 2019. More information can be found here.
- Double Dipping: The double dip argument comes into play when valuing a business. In a property settlement, some of the cash flow goes into determining the value of the business and some goes into compensation being paid to the owner. The business owner cannot claim all of this cash flow as income. For child support, the general rule is that income is the total amount available. For alimony, you can take only the amount pulled out of the business. There is no bright line test in Michigan. Each case will be based on fact and circumstance.
- Michigan Child Support Formula Manual: The Manual was updated in 2021. Previously, the language for capital gains was vague, and some attorneys treated capital gains as excludable from income. Now, net capital gains are included as income. See MCSF 2.01(C)(6). There is also updated language on depreciation. Before the update, there was not necessarily straight-line depreciation of business assets. This has been clarified under MCSF 201(E)(4)(e)(iii).