If you have one or more minor children and get a divorce, it is likely that either you or your spouse will be ordered to pay child support. The age at which child support ends depends on the laws in your state. If your attorney or mediator has enough financial information about you and your spouse, he or she should be able to calculate an estimate for monthly child support.
What if you are just contemplating divorce or are separated and want a rough idea of what you could expect to pay or receive in child support after a divorce is final? A certified divorce financial analyst (CDFA) may be able to help you determine an estimate based on pay stubs, tax returns, and other information. He or she can run scenarios based on different assumptions and give you a range of what you could expect.
With Family Law Software, I can calculate child support estimates for more than 20 states and sometimes a parent will book a couple of hours with me to gather information and run some calculations. What if you have 50% custody of your children? What if you have more than 50% custody? What if you land a higher-paying job? It is interesting to test how certain assumptions affect the monthly amount for support. You cannot depend on these estimates, of course, as the final determination will be made during negotiations between you and your spouse (either through litigation or alternative dispute resolution such as mediation) or by a judge.
You and your spouse’s pay stubs provide valuable information which can be used to calculate child support. You will want to find out which payroll deductions are included in the calculation in your state. Deductions may include certain taxes, health care insurance premiums, mandatory union dues, and mandatory retirement contributions (such as those to fund a government pension).
One of my California clients was shocked to learn how little she would receive in child support after I ran several calculations using my software. She was a stay-at-home mother and her husband earned about $90,000 in gross income. But, because the family was on an expensive health insurance plan (an HMO) with monthly premiums for a family of four costing $1,500 a month, and her husband was required — as a condition of employment — to contribute a high percentage of his pay into the county’s pension system, the monthly child support was much lower than she had expected. Had he earned the same salary in a private sector job without a pension or subscribed to a less-expensive health insurance plan the estimate for monthly child support would have been much higher.
While you and your spouse’s pay stubs will provide some information about income and deductions, in order to see the full picture you need to examine your joint tax return (or both of your separate returns). If you are one of those people who have never looked at anything but the first page of your tax return before signing it, I guarantee that if child support is a concern, you will want to understand what is included in your tax return and how to read it.
Wages are just one form of income. In California, the definition of “income available for support” is very broad. In Massachusetts, there are about 30 categories of income included in the child support guidelines. Most of these you won’t find on a pay stub such as: insurance pay, annuities, social security, royalties, workers’ compensation, unemployment compensation, and trust income and distributions. In cases where executives or other employees receive perquisites or “in-kind compensation” such as a cell phone or vehicle allowance, often a value for personal use is estimated and added back into income available for support.
The tax return points to income-producing investments outside of a retirement account. Check out Schedule B for interest and dividends and Schedule D for capital gains. In one case on which I worked the father sold a business and invested all the proceeds into tax-free municipal bonds. While he may not have to pay income taxes on that income, it is still considered income for child support purposes.
With more people working for themselves than ever, calculating child support payments is becoming more complicated. I often have a field day when reviewing the Schedule C of the tax return of a self-employed parent. This is how many self-employed people report their income unless they have designated a legal business entity such as a corporation. Many parents think that the Schedule C income (or loss) reported on the income tax return is the amount that should be used to input into the child support calculation. That is usually a mistake.
If you or your former spouse is self-employed, you should be aware that just because the IRS allows you to deduct certain expenses from your business income, a court might add some of those deductions back as income when calculating child support. Common examples are deductions for a home office, depreciation, and the portion of cell phone and car expenses that are used for non-business purposes.
In a general sense, income can be calculated by taking money made from a business venture and subtracting money required to operate the business. When I see a large expense for travel on a Schedule C, I often wonder if there was some personal travel included in that number.
Sometimes the self-employed spouse knows a divorce is coming and starts padding the expenses of the business (which really aren’t that necessary) to make it look like his or her income is really low. Does the business really need to lease a Maserati? Is this business expense considered “excessive?” Could business be conducted with a Chevy?
During their divorce negotiations, some couples agree to exchange tax returns with each other every year in case income fluctuates and one party believes there is grounds for a child support modification. If you don’t know how to read a tax return, you can always contact a CDFA or tax professional to learn.
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