Calculating Income for Child Support in Arizona
Various Sources of Income to Consider
The Arizona Court of Appeals ruled on how the trial court should interpret full-time employment within the Arizona Child Support Guidelines and how to apply the calculation of a parent’s income to calculate a child support obligation in Shane M. McNutt v. Vanessa A. McNutt.
After Shane and Vanessa began living together, they had a daughter in 1995 and married the following year.
Vanessa filed for dissolution of marriage in 1999. During their entire relationship, Shane worked as a caretaker for developmentally disabled clients at several residential facilities.
In 1993 or 1994, he started working eighty hours per week to enable the parties to purchase a home. Shortly after they separated, Shane reduced the number of hours he worked to sixty-four hours per week.
Although he was still working sixty-four hours when the case was tried in 2000, Shane testified he wanted to further reduce the hours he worked to increase the quality of time spent with their daughter.
He testified he had not yet done so because he would have been unable to pay the full amount of the temporary family support order if he worked less than sixty-four hours per week.
In addition to his salary, Shane also received monthly income from a rental property. However, he testified that he received no net income after paying the monthly mortgage and other expenses associated with that rental property.
Vanessa initially testified he received a net income from the property of $220.00 per month, but later admitted that figure simply reflected the difference between the rent payment and the mortgage and she did not know how much net income he actually received after paying other expenses.
After taking the matter under advisement, the trial court ordered Shane to pay $484.00 per month in child support but did not allocate the federal tax exemption for the child. Shane appealed the trial court’s decision to the Court of Appeals.
Calculating Parents’ Gross Incomes
The court stated that the first step in determining the parents’ support obligation was to calculate each parent’s gross income.
The Arizona Child Support Guidelines define gross income broadly as income from any source and any fluctuating income shall be annualized.
Income from any source which is not continuing or recurring would not necessarily be deemed gross income for child support purposes and it is generally not expected that a parent will earn an income greater than what would be earned from full-time employment.
Shane contended that the court erred in using his eighty-hour workweek to determine his child support obligation because there is no common standard definition, other than a forty-hour workweek, that is generally associated with full-time employment.
He also asserted that any income earned from working more than that forty hours should be characterized as overtime income and excluded from the calculation of a parent’s gross income.
He argued the Guidelines have implicitly adopted the approach of forty hours being recognized as full-time employment by citing a provision that states: “Seasonal, overtime, or fluctuating income shall be averaged.
When income from a full-time job is consistent with income during the marriage, income earned as the result of overtime hours or a second job may be disregarded.”
Income for Child Support Calculation is Not Limited to Full-Time Earnings
The appellate court, however, did not interpret the Arizona Child Support Guidelines as limiting full-time employment to forty hours.
The Arizona justices were not persuaded by his claim that anything over forty hours per week is necessarily overtime because overtime is generally defined as time beyond an established limit or working hours in addition to those of a regular schedule.
Shane’s regular schedule as of the trial was sixty-four hours, not forty.
The justices added that the change in the definition of gross income permits an already fully-employed parent to work extra hours or a second job without thereby incurring an increased support obligation.
But they did not believe the Guidelines entitled a parent who continued to work the same schedule as they consistently worked during the marriage to a lower child support obligation.
The court continued by stating that the definition of gross income from self-employment in the Arizona Child Support Guidelines is clearly not limited by any artificial construct of a forty-hour workweek, nor could it be.
The court asserted that if they accepted Shane’s position and construed the Guidelines as imposing an hourly limitation on the amount of earned income generated from full-time employment, they would be fostering a situation in which children of parents with comparable gross incomes would receive inconsistent child support awards depending on the parent’s type of employment rather than ability to pay, a result unfair to both children and parents.
Income from Voluntary Overtime Versus Mandatory Overtime
Also, the Arizona Court of Appeals disagreed with Shane’s argument that the Guidelines now require the trial court to disregard all overtime wages when calculating gross income, regardless of the nature of the overtime.
The justices believed the more likely intent of the Guidelines, one consistent with the concept of full-time employment, was to generally exclude only non-mandatory or voluntary overtime from gross income.
The court of appeals also examined the issue raised by Shane’s objection to the trial court’s attribution of a greater amount of income to him that he was actually earning at the time of the trial.
He had voluntarily reduced his work schedule from eighty hours per week to sixty-four hours approximately sixteen months before trial, but the court still attributed income to him based on his previous eighty-hour work schedule.
The appellate court felt that to do so, the trial court necessarily concluded that he was not working at his full earning capacity.
Shane again asserts that a parent who works forty hours per week is necessarily employed at their full earning capacity. The court examined past cases for precedent to decide if the trial court abused its discretion on this issue.
In Little v. Little, the Arizona Supreme Court adopted an “intermediate balancing test” for trial courts to apply when deciding whether to use actual income or earning capacity in making a child support determination when a non-custodial parent voluntarily reduces their income by terminating their employment.
Among the factors, the trial court should consider are the financial impact on the children, the reasonableness of the parent’s decision, and whether the decision was made in good faith.
In this case, Shane did not terminate his employment, but only reduced his work schedule and was still working sixty-four hours per week.
Court Should Apply a Balancing Test to Overtime When Determining Income
Although the Little balancing test is still applicable here, the court cautioned that trial courts generally should not attribute additional income to a parent that would require an extraordinary work regimen.
Also, in the matter of Marriage of Simpson, the California Supreme Court answered the question of whether earning capacity should, as a general matter, properly be measured by the work regimen engaged in by the supporting spouse during the marriage even if such a regimen was extraordinary, requiring excessive hours or an onerous work schedule.
The court concluded that the concept of earning capacity should be measured by the standard of an objectively reasonable work regimen rather than one requiring excessive hours.
The determination of what constitutes a reasonable work regimen depends upon all relevant circumstances, including the choice of job available within a particular occupation, working hours, and working conditions.
Utilizing the precedent set by these cases, the appellate court decided that the trial court did not articulate any reasons for attributing sixteen additional hours to Shane’s weekly schedule and the record revealed no reasonable basis for doing so.
Therefore, they concluded that the trial court abused its discretion on this issue.
It appears clear that the burden of proof of establishing whether it is appropriate to include works hours in excess of forty hours per week is on the parent asserting such a claim.
Shane also argues that the trial court’s application of the Guidelines violated his due process and equal protection rights by infringing on his fundamental right to decide the terms of his own private employment and, therefore, how he utilizes his personal time.
He cited no authority for his claim that he has a fundamental right to have his child support obligation based on a forty-hour workweek, and the court knew of none.
The justices also stated Shane was not treated differently from other divorced parents because in all cases, a parent’s actual, regular, and continuous income is the basis for the child support award.
Thus, they ruled that his constitutional objections lacked merit.
Allocation of Federal Tax Exemption in a Child Support Case
Lastly, Shane claimed that the trial court abused its discretion by failing to allocate the federal tax exemption for his child.
The court cited the Guidelines, which provide that in cases where the child support obligation is at least $1,200 per year, there “should” be an allocation of the federal tax exemptions applicable to the children that as closely as possible approximate the percentages of support being provided by each of the parents.
The appellate court concluded that, based on the intent of the Guidelines and the interest of parents in the allocation of the federal tax exemption, the word “should” as used in the Guidelines is mandatory rather than discretionary.
Therefore, they ruled the trial court abused its discretion by failing to allocate the federal tax exemption and they directed the trial court to allocate the exemption on remand.
Determining the gross income of a non-custodial parent is essential to calculating their child support obligation.
This case demonstrates a parent working overtime at their job can have that compensation attributed to them as part of their gross income.
The Arizona Child Support Guidelines do not limit full-time employment to forty hours per week and as long as said overtime is part of a regular schedule the court will use it as part of their calculation.
However, if the parent changes their regular work schedule during or shortly before the proceedings, the court must be careful to not attribute too many or too little hours without a reasonable basis.
Also, the court must allocate the federal tax exemption for any minor child to the parents if the court rules for a child support obligation of at least $1,200 per year.
How Tax-Free Income is Used to Calculate Child Support in Arizona
Although it does not come up very often, some people are faced with the issue of how tax-free income is used to calculate child support in Arizona. In Arizona, child support is calculated according to the Arizona Child Support Guidelines.
These Guidelines require the calculation of child support to be based on the “gross incomes” of the parents. So, what happens when one parent pays income taxes and the other parent has an income tax free stream of income, such as payments for some forms of disability pay.
Fortunately, the Arizona Court of Appeals in the published case of Mead vs. Holzmann answered that question. In that case, the mother and father went to court to modify the child custody arrangements of their children. Both parents agreed the children would go from living primarily with the mother to primarily living with their father.
Calculating Child Support Using Taxable Income Versus Non-Taxable Income
The parents, however, did not agree if the mother should pay child support and if so, the amount of that child support. Mother earned a salary and, like most of us, she also paid state and federal income taxes on her salary. Father, however, received a non-taxable monthly disability payment and, therefore, did not have to pay any state or federal income taxes on his income.
As a result, Mother argued the trial judge should have “grossed up” Father’s non-taxable income when determining the “gross incomes” of both parents, pursuant to the Arizona Child Support Guidelines. Well, the trial court disagreed with Mother and used Father’s non-taxable income and Mother’s taxable income to calculate the amount of child support she was ordered to pay father. Mother appealed that decision to the Arizona Court of Appeals.
The mother argued Father would receive a windfall because of the tax-free status of his income. She argued that by failing to “gross up” Father’s income he received a higher amount of child support than Mother would otherwise be ordered to pay.
Using Gross Incomes to Calculate Child Support
The Court of Appeals started with an analysis of the Arizona Child Support Guidelines. They indicated the Guidelines provide a standard method of calculating child support in an amount consistent with the needs of the children and the ability of the parents to meet those needs. The Guidelines provide a formula that uses the gross incomes of the parents.
Mother argued that the failure to “gross up” Father’s income when calculating child support equates Father’s net income to her gross income. She also argued that the Guideline child support amounts take into consideration the effect of income taxes on gross earnings. In this case, Father did not have to pay income taxes on the disability payments he received resulting in Father receiving a windfall in the child support calculations.
Father argued the Guidelines do not contain any language allowing a court to “gross up” non-taxable income. He also argued that requiring a trial judge to “gross up” his income would overly complicate the calculation of child support in Arizona. Instead, he argued the Guidelines allowed a court to deviate child support in lieu of “grossing up” non-taxable income; which he argued the trial court did not feel was necessary in this case.
A Judge May Not “Gross Up” a Parent’s Earnings Under the Guidelines
The Court of Appeals held a judge in not required to “gross up” non-taxable income when calculating child support in Arizona. The court held that avoidance of taxation is not a source of income but is, instead, simply a cost savings. The Appeals Court went on to point out the provision in the Guidelines that says gross income “does not have the same meaning as when [it is] used for income tax purposes.
The Court of Appeals also agreed with Father that requiring a judge to “gross up” non-taxable income when calculating child support would unduly complicate the calculation of gross income in child support cases, which may result in inconsistent results from case to case.
The Court of Appeals pointed out that one of the purposes of the Arizona Child Support Guidelines was to make it easy to calculate child support in Arizona. For example, the court would have to consider different tax treatments for capital gains, personal injury awards, interest earned from government bonds, unemployment benefits and the like.
Child Support Deviation in Lieu of a “Gross Up” of Non-Taxable Income
Although the Court of Appeals ruled the Guidelines do not allow a court to “gross up” non-taxable income for purposes of child support in Arizona, they also ruled a court can order a child support deviation based upon the fact one parent’s income is taxable income and the other parent’s income is not taxable.
In this case, it was unclear to the Court of Appeals whether the trial judge knew he had the ability to deviate from the amount of child support calculated by applying the Guidelines in this particular case. As a result, the Court of Appeals remanded the case back to the trial court to determine if a deviation in child support was warranted given Father’s income was not subject to income tax.
If you have questions about calculating income for child support in Arizona, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona child support and family law attorneys have over 100 years of combined experience successfully representing clients in child support and family law cases.
Our family law firm has earned numerous awards such as US News and World Reports Best Arizona Family Law Firm, US News and World Report Best Divorce Attorneys, “Best of the Valley” by Arizona Foothills readers, and “Best Arizona Divorce Law Firms” by North Scottsdale Magazine.
Call us today at (480)305-8300 or reach out to us through our appointment scheduling form to schedule your personalized consultation and turn your child support or family law case around today.
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