As the global pandemic began to impact the U.S. economy, Congress passed sweeping legislation in an attempt to deal with the anticipated fallout. First, Congress passed the Families First Coronavirus Response Act (FFCRA). Shortly thereafter Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Between the two acts there are provisions that could impact the determination of income, and therefore support computations for divorced and divorcing parties.
FFCRA and the CARES Act made changes to tax law that can impact divorcing and divorced families. There are four basic programs created in this legislation which provided financial relief and/or stimulus payments. Each of these programs could have an impact on net income for purposes of support, child and spousal.
1. Stimulus payments, technically called the Stimulus Recovery Rebate (SRR) or Economic Impact Payments (EIP)
2. Paycheck Protection Act (PPP) forgivable loans
3. Economic Injury Disaster Loan Advances (EIDL Advances)
4. Economic Injury Disaster Loan (EIDL Loans)
The most widely implemented program in the CARES Act is the individual stimulus payment, which is in many cases automatically deposited money into taxpayers’ bank accounts. Technically called “recovery rebates,” this is a new refundable tax credit for taxpayers’ 2020 taxes that were created by the CARES Act.
Unlike most tax credits, recovery rebates were paid out immediately to Americans who qualified to receive them. This means that an American who qualified for a $1,200 recovery rebate received a check (or direct deposit) for $1,200, rather than having to wait until his or her 2020 taxes are filed next year. In late 2020, Congress passed a second round of stimulus checks, this time for $600 per taxpayer, including their children. A family of 4 could receive $2400. More financial stimulus is still under consideration in the current Congress and is likely to pass.
The money that taxpayers received via their stimulus check is not taxable, meaning it does not count towards their 2020 taxable income. In addition, the check is not an advance on their 2020 tax refund, since they are mutually exclusive. Stimulus checks are also not a loan, so taxpayers do not need to pay the money back to the federal government.
For divorced and divorcing families, after the question of who gets possession of this money (which was deposited based on the prior year’s income tax filing status and account information), the impact on income for purposes of support should be considered. Again, if support is based on all income from all sources, and the definition of income does not rely on the IRS definition but includes all money (or wealth) received, this money should be included as income for purposes of support.
The stimulus rebate will essentially reduce taxes for the 2020 tax year, which would increase net income for purposes of child or spousal support. Factors that mitigate against including these amounts as income for purposes of support include that the SRR is a one-time payment (it is still an open political question whether it will again be repeated or expanded) and will not have a long-term impact on income for purposes of support.
While not determinative, the IRS does not consider these funds to be income, and it will not be counted as additional taxable income. Each parent could have received this payment (if not phased out or otherwise disqualified), so for the majority of states that based support on an income shares method, the SRR would have an impact on both parents, and ultimately a very small impact on support. Additionally, the cost of returning to court to compute the impact outweighs the benefit of a possible small increase in support.
Congress continually passes legislation which impacts divorced and divorcing families, with little regard to or explanation of the intended impact on child and spousal support. Most practitioners are confused by these shifting rules, and often do not understand the complete impact of these various options on state guidelines for support.
Use of comprehensive divorce financial software such as Family Law Software can significantly assist in making sure all potential tax implications are considered in the guideline calculations. In this instance, Family Law Software defaulted to excluding the payments from income for child support, but provided a way to include them if the practitioner so desired.