Tax Act and Jobs Act – Its Impact on Child and Spousal SupportFebruary 9, 2018
As part of our ongoing commentary on the impact of the recently passed Tax Cuts and Jobs Act (hereinafter the Act) which will take effect beginning in the 2018 tax year, this article will continue to review some of the impact that the Act will have on individuals receiving or paying support obligations. In Pennsylvania, the calculation of support obligations is based heavily on parties’ net incomes. In the last article, we discussed the elimination of the Personal Exemption and how that will impact on child support calculations. This article will continue to explore sections of the Act that impact on the calculation of net incomes and on the support guidelines in general.
Start with the premise that the Support rules and regulations and the Monthly Basic Child Support Schedule are based heavily on the concept of net income. The following provisions of the Act will impact on the calculation of net income:
- Personal exemptions are phased out.
- Mortgage interest and state and local taxes deductions are capped.
- Other itemized deductions have been capped or eliminated.
- Child credits have altered.
- Standard deduction has been increased.
Another change brought about by the Act is the change in the individual rates as set forth in the tax brackets. Regardless of an individual’s income, the change in brackets will undoubtedly change a party’s net income. It is also important to note that the Monthly Basic Child Support Schedule is updated annually to reflect any changes in the tax tables. However, since the changes brought about by the Act are so recent, it is possible that the tables have not been updated in the various calculation software packages or even in the systems utilized by the various County Support offices. If not already implemented, the new Schedules should be available in the near future, but in the interim, it is important to be cognizant of the change and question any calculations that are performed to be certain that they are based upon the new tax brackets.
As indicated above, the Monthly Basic Child Support Schedule is based on incomes that have been adjusted by the effective tax rates and brackets. The Schedule also addresses and makes assumptions about situations involving combined orders for child and spousal support. Under the “old tax act”, spousal support was deductible to the payor and taxable to the recipient.
Under the Act, beginning in 2019, spousal support will no longer be deductible to the payor and it will no longer be taxable to the recipient. Perhaps more than any other change brought about by the Act, this change, in cases where relevant, will have the greatest impact on net incomes.
The guideline formula for calculating orders for child and spousal support assumes that such orders will not be allocated between child and spouse but rather all orders will be unallocated and such unallocated orders are all taxable to the recipient and all deductible to the payor. The Monthly Basic Child Support Schedule is designed to have taken into consideration the tax impact of unallocated orders so that payments do not have to be adjusted for tax consequences. (The schedule has presumably been adjusted to consider such unallocated orders deductible to the payor and taxable to the recipient.) Assuming that is the case, the new Schedule will have to be adjusted not only to reflect the new tax rates and brackets (effective January 1, 2018) but also to reflect the fact that prior tax considerations pertinent to the taxability/deductibility of spousal support payments have been reversed (effective January 1, 2019).
In cases involving only spousal support, spousal maintenance and alimony, (i.e., there is no order for child support), the Monthly Basic Support Schedule is not applicable. The Act does, however, have the same impact on these payments, since by the beginning of 2019, alimony will no longer be deductible to the payor nor taxable to the recipient. This change and the changes to combined child and spousal support payments discussed above, will require a revamping of several portions of the Support Guidelines as well as the formula for calculation of these obligations that are set forth in the Regulations.
The changes discussed above could result in the need for support obligations to be modified. Until the Monthly Basic Child Support Schedule and Regulations are adjusted to reflect the impact of the Act, it is difficult to tell exactly how, or if, the changes will impact on a specific support order. And keep in mind that some, but not all, of the changes are not effective until 2019. It would make sense therefore to have a support order recalculated both now and then again at the beginning of 2019 to determine whether an adjustment is required. Keep in mind that a request for a modification will be considered if, and only if, there has been a material and change in a party’s economic circumstances”. Pennsylvania Rule of Civil Procedure 1910.19 (a) provides specifically that a “new guideline amount resulting from new or revised support guidelines may constitute a material and substantial change in circumstances. Therefore, if you believe that your support obligation may be impacted by the Act, it would be wise to have the calculations run by your attorney to determine whether there is a change, and if so, if it is a change that benefits you sufficiently to petition the court for a formal change of order. Any change will be effective from the date of filing and not retroactively, so if you will benefit from the Act and its change on net income calculation or guidelines and Schedule, the sooner you file the greater the benefit.