CLINTON’S ECONOMIC PACKAGE : Think Twice About That Divorce : Law: With a potential widening of tax brackets, knowing the difference between alimony and child support could save you thousands of dollars.

Daniel Jaffe, a prominent Beverly Hills family lawyer, may surprise you when he names the most important financial consideration when getting a divorce. It’s not who gets the house or the business or the retirement money.

Essentially, it’s who gets the tax deductions.

Tax planning is one of the most vital, yet misunderstood and ignored, items in a divorce, Jaffe says. And now that the Clinton Administration is seeking to increase tax rates for high-income filers, a cornerstone concept in divorce planning called “bracket arbitrage” is becoming far more pivotal, particularly for the wealthier set.

Clinton’s proposed tax hike for high-income individuals will dramatically widen the difference between the highest and lowest tax brackets.

“With tax brackets spreading again, it’s time to start playing bracket arbitrage,” Jaffe says.

But even middle-income couples--who won’t see an increase in their personal income tax rates under the Clinton plan--can save substantial amounts by being aware of the tax implications of divorce, experts say.

Bracket arbitrage pivots around a simple idea. In many divorces--particularly those that involve children--the individual who earns the most money must pay support to the individual who earns less or nothing. If the high-earner can get a tax deduction for those payments, he or she can pay more and still be better off.

Couples with children or large amounts of assets can save tens of thousands of dollars by playing the game.

Bracket arbitrage is surprisingly easy to do. All it takes is a negotiated settlement--rather than a litigated one. And a little knowledge about the tax code.

The simplest and most common form involves turning non-deductible monthly payments into deductible ones, tax experts say. How? Child support--which is neither deductible to the giver nor taxable to the receiver--becomes alimony, which is deductible to the giver and taxable to the receiver. This effectively gives tax deductions to the wage earner who needs them and gives income to an individual who has deductions that otherwise can’t be used.

To illustrate, consider a couple with one child. We’ll call them John and Jane Smith. John earns $51,000. Jane stays at home with their 5-year-old child, John Jr.

They decide to split up and must decide what to call the support payments John plans to pay to Jane and John Jr.

To figure it out, they must consider their entire tax picture, including tax brackets and itemized deductions, says Philip J. Holthouse, partner at the accounting firm of Holthouse Carlin & Van Trigt. For the sake of this example, we’ll say John’s taxable income, after itemized deductions and personal exemptions, is $34,598. Based on current rates, his federal tax amounts to $6,893.

If John pays Jane $1,500 a month, or $18,000 a year, in child support, he has no additional deductions. And Jane has no taxable income and pays no tax.

What happens if he calls the payments alimony?

John gets an additional $18,000 in tax deductions, which drops him into a lower tax bracket. His total federal tax falls to $2,719. His California state tax drops from $2,102 to $596.

However, Jane now must pay tax on the $18,000. But since she has personal exemptions worth $4,600 (two times $2,300) and a head-of-household standard deduction worth $5,250, she’s only paying federal tax on $8,150. Her federal tax amounts to $1,226. Her state tax is $51, Holthouse says.

The Smiths have saved a total of $7,719. The end result is John is in a much better position to pay his ex-wife. He can even pay more because of the tax deductions than he would if he couldn’t deduct the payments.

What does it take to turn child support into alimony? It’s almost all in the name. Couples with children can generally decide what to call the payments, and what they’re called determines their deductibility.

There are two significant caveats. The husband and wife must agree to a divorce settlement rather than litigating an agreement in court. That’s because litigated divorce settlements are decided via state formulas that generally spell out--to the dollar--how much child support the high wage-earner must pay. The amounts differ in each state and by income. But all states have set standards because such standards are required for states to continue receiving money for certain federal aid programs.

The second caveat is your alimony payments may not terminate within six months of your child’s 18th birthday. Nor, for that matter, can they be tied to any event related to your children.