Now that April 15th has passed, the dust is still settling about how tax changes impacted taxpayers and many of us were surprised at the effects. The effects of the new tax laws also changed child and spousal support payable in Pennsylvania.
As of January 1, 2019 new guidelines are now in effect. These have been put in place largely to deal with the issue that alimony and temporary alimony or support payments to a spouse are no longer tax deductible by the person paying support, nor includable as income by the recipient. These new guidelines pertain to any new orders after January 1, 2019, but not the modification of prior orders. So it’s important to understand whether your case will be calculated under the old or new guidelines, as it makes a difference.
Because of the new tax law, the changes are mostly affecting spousal support and alimony, but in some ways child support is also being impacted. Prior to January 1st of this year, spousal support was calculated as 40% of the difference in the net incomes of the parties if there was no child support order, and 30% of the difference if there was child support. When there was child support included, the entire support order was often lumped together — called an unallocated order. Under the prior tax laws, those unallocated orders were fully deductible by the payor and includable as income for the payee. Unallocated orders were commonly negotiated to reallocate income in a situation where the person paying support had a high tax bracket, and the person receiving support had little income and often the deductions for the minor children and thus a low to zero tax liability. This benefitted both parties.
Since January 1, 2019 there is no more deductibility and the guidelines have thus reduced the amounts payable to recipients in order to compensate for the different tax treatment. Recipients of support are seeing their awards go down. The benefit of the unallocated orders is also off the table now. The new calculations for spousal support are 33% of the net income of the obligor, minus 40% of the net income of the obligee. If there is child support, it reduces to 30% of the net income of the obligor, minus 25% of the net income of the obligee. Another big change is that if the order is also for child support, the new guidelines calculate the spousal support first, and then reallocate the incomes before applying the guidelines for child support. This not only lowers the child support calculation, but it also changes the ratios when calculating the “extra” expenses, like the percentage obligation for unreimbursed medical expenses, or other expenses such as child care.
To illustrate, consider a situation for spousal support where the parties’ gross incomes are $120,000 and $50,000, respectively. Under the old guidelines, and using an after tax net, the spousal support award would have been $1,536.38 monthly and deductible but includable as income. Under the new guidelines, it would be $1035.36 monthly but neither deductible nor includable as income. That is a big change, especially if the recipient spouse paid little actual tax on the income.
If you consider the same family with spousal support and add child support for two children, the monetary change is less significant– $2,273.58 versus $2,165.80 monthly. However, the percentage obligations for the “extras” goes from 69%/31% to 61%/39% , so if the child care or other expenses are high, this will make a difference.
Whether the new guidelines will affect your support order depends on the timing, so talk to your counsel and make sure you understand what guidelines will be applicable to your case, so you won’t be caught by an unexpected surprise.