Over New Year’s Weekend, our Congress passed legislation to avert the “fiscal cliff,” which would have resulted in dramatic income tax increases. The new law has ushered in tax increases, to be sure, but those tax hikes are not as dramatic as what might have occurred if Congress had not belatedly acted. The Fiscal Cliff tax legislation makes changes to the Internal Revenue Code, including the following:
- The 39.6% tax bracket was restored for taxpayers who earn more than $400,000 per year ($450,000 for joint filers)
- The payroll tax holiday (which provided a 2% tax break for most workers) was not renewed
- The alternative minimum tax (AMT) has been fixed
- The capital gains tax bracket has been increased to 20%
- The phaseout of itemized deductions and personal exemptions has been restored
- The estate tax was raised to 40% on estates worth more than $5 million ($10 million for married couples)
- The child tax credit, earned income credit and college tuition credit have been renewed
For parents who are paying or receiving child support, a tax increase may affect net income, which may be grounds for a modification of child support if the tax increase would cause “substantial and continuing” change in circumstances. Whether the child support would go up or down depends upon which parent is affected by the tax increase. Is it time to call your divorce lawyer? Here are some estimates to help you decide whether to call:
- The 39.6% tax bracket is a 4.6% tax increase for taxpayers who earn more than $400,000. The additional tax might be $18,400 per year, or $1,533 per month (ignoring the effect of tax deductions and exemptions, which may be phased out in 2013). For parents who have one child, the child support guideline might be greater than 11% of net income, so a $1,533 tax hike might justify a child support modification of $150 per month. For parents with two children, the guideline is probably 15%, so the child support modification might be $220 per month.
- The payroll tax holiday began in January 2011, providing workers with a 2% tax break on the first $110,100 of earned income. A taxpayer who earned $50,000 per year would save $1,000, or $83 per month. (Taxpayers earning $100,000 saved $2,000 in payroll taxes.) For parents whose support orders were issued before January 1, 2011, the payroll tax holiday probably did not affect your child support. For those who entered into a new or modified child support order in 2011 or 2012, the tax holiday may have affected net income, so you might want to seek modification of child support. The child support guideline at the $50,000 income level is approx. 25% of net income, so the adjustment might be $20 per month in 2013. At the $100,000 level, the child support guideline is around 17% of net income, so the $167 tax hike might justify a child support adjustment of $28 per month. Is it worth the cost of fighting in court? Probably not, but it might be worth a letter from your lawyer.
- The capital gains tax hike will mostly affect parents whose income is derived primarily from investments. Trust fund parents and C-suite executives who get paid in restricted stock and SARs, call me. Others, probably not.
In short, the tax increase is likely to affect child support for high net-worth individuals more than average taxpayers. Tax consequences are just one reason why experienced lawyers who concentrate their practice in family law can provide a competitive advantage. If you have a question about your child support obligation, and how the new tax law will affect you, give us a call.