Editor's Note: Mr. Walzer is a Certified Family Law Specialist and a partner in the firm Walzer Melcher, LLP, specializing in family law. He is also a past Chair of the LACBA Family Law Executive Committee. Leena S. Hingnikar is a Certified Family Law Specialist and is an associate with Walzer Melcher, LLP. Leena is also a member of the Family Law Executive Committee for the Los Angeles County Bar Association.
It is remarkable how a carefully crafted court order can generate extra cash flow for the parties. By the use of combined child and spousal support orders, known as family support orders, the parties can generate more available income for both parties (Family Code §92). These orders can be agreed to by the parties or ordered by a court (Family Code § 4066). These orders can be especially helpful when only one spouse is working and has limited income to support two households. To communicate the benefit of these orders, you must have a working knowledge of your support program. This concept is best explained with an actual case. In this hypo, Dad makes $8,000 per month and Mom earns nothing. They have two children with a 20% time share to Dad. There are no itemized deductions. Dad pays $250 for health insurance. Guideline spousal support is $1,239 per month. Guideline child support is $1,979. Dad's net spendable income is $2,353 and Mom's net spendable income is $3,218 per month. Mom cannot afford to pay her expenses with this net spendable income. We can generate $854 in more income to Mom by agreeing to a family support order. Dad's net spendable income goes up from $2,353 to $2,359 per month and his tax liability goes down by ordering Dad to pay Mom $4,400 per month in family support. It is easier to convince the court if you can present the data showing the savings to parties clearly—especially with demonstrative evidence.
Here is a graphic representation of these savings:
Compare net spendable income with and without family support
To calculate the optimum family support, toggle the "Tactics" tab on the toolbar and select "Tactic 1."
Enter your proposed family support under "Deductible payment" —here we enter $4,400, but you may have to test this out with many different numbers to determine the optimum family support. To receive the maximum benefit of the deduction, the whole payment has to be deductible to the payor. Your goal is to keep the payor's (in this case Dad) net spendable income the same as if he were paying guideline child and spousal support. Be sure to check "Yes" under "Release optimal dependent exemptions via IRS Form 8332." The support program will show which party will get the maximum benefit from the dependency exemption. You must incorporate this in your order and make sure the payee fills out IRS Form 8332.
By comparing the net spendable income based on the guideline and the net spendable income in the “Proposed” section, you can compare Dad’s total tax savings— $2,179 per month in a regular order and $991 per month in a family support order. Instead of paying the additional $1,188 to the government in taxes, Dad pays the money to Mom ($854 a month) and still saves money in taxes. Remember that this does not work for every family. If the payee is in the same tax bracket as the payor, the family support order will not generate any savings, therefore it has limited use in high earner cases.
These orders can be tricky to draft and may result in unforeseen circumstances. The order should state that they terminate on the death of the payee, and the order should state that the support is deductible to the payor and includible in the payee's income. The payor should discuss changing his or her withholding allowances with a competent tax professional because a payor will only realize a benefit from the orders if the payor receives the maximum cash flow from his or her monthly paycheck. Otherwise, the payor may not be able to afford his or her own expenses).
One thing to keep in mind when deciding if a family support order is right for your client is that there can be no step downs in family support apportioned to the children. The order cannot change when your client's children reach the age of majority, graduate from high school or college, marry, or die (IRC § 71). Therefore, if the order contains a date for downward modification, the date should not be contingent upon events related to children. These orders may be challenging to modify later and may bring up a host of issues that the parties could have avoided by a standard guideline order. When drafting the family support order, make sure that the parties will not be filing joint tax returns for the year in which you are drafting the order and that they live in separate residences (unless it is temporary support order).
A knowledge of tax law, your favorite support program, and the facts of your case, can save the parties thousands of dollars—all compliments of the IRS. Be prepared to educate your opposing counsel and your judicial officer. Show them this article and maybe they will believe you.