Calculating Income for Child Support in Arizona
Various Sources of Income to Consider
The Arizona Court of Appeals in the case of McNutt v. McNutt ruled on how the trial court should interpret full-time employment within the Arizona Child Support Guidelines.
Shane and Vanessa began living together, had a daughter, and married in 1995.
Vanessa filed for dissolution of marriage in 1999. Shane worked as a caretaker for developmentally disabled clients during their entire relationship at several residential facilities.
Impact of Working Overtime on Child Support
In 1993 or 1994, he started working eighty hours per week to enable the parties to purchase a home. Shortly after separating, Shane reduced his hours to sixty-four hours per week.
Although he was still working sixty-four hours in 2000, Shane testified he wanted to reduce the hours he worked to increase the quality of time spent with their daughter.
He did not reduce his work hours to pay the temporary family support order if he worked less than sixty-four hours per week.
Impact of Income from Investment Property on Child Support
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 of $220.00 per month from the property. She did not know how much net income he received after paying other expenses. Still, she later admitted that figure reflected the difference between the rent payment and the mortgage.
After taking the matter under advisement, the trial court ordered Shane to pay $484.00 per month in child support. Still, it did not allocate the federal tax exemption for the child. Shane appealed the trial court’s decision to the Court of Appeals.
Calculating a Parents Gross Incomes to Calculate Child Support
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. The court will typically annualize fluctuating income.
Income from any source which is not continuing or recurring would not necessarily be deemed gross income for child support purposes. It is generally not expected a parent will work overtime to pay support.
Calculating Income for Working Overtime
Shane contended that the court erred in using his eighty-hour workweek to determine his child support obligation.
He also asserted that any income earned from working more than forty hours should be considered overtime and excluded from calculating a parent’s gross income.
He argued the Guideline provision requiring a court to average “seasonal, overtime, or fluctuating income” implies that full-time employment is a forty-hour workweek.
When income from a full-time job is consistent with earnings during the marriage, the court should disregard income earned as the result of overtime hours or a second job.”
Income for Child Support Calculation is Not Limited to Full-Time Earnings
However, the appellate court did not interpret the Arizona Child Support Guidelines limiting full-time employment to forty hours.
The Arizona justices rejected that anything over forty hours per week is necessarily overtime. Instead, overtime is working more than 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 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 stated the definition of gross income from self-employment is not limited to a forty-hour workweek, nor could it be.
The court rejected Shane’s position on an hourly limitation on the amount of earned income generated from full-time employment. That would result in children of parents with comparable gross revenues receiving inconsistent child support awards depending on the parent’s type of employment rather than the ability to pay. The cour felt that would be unfair to both children and parents.
Income from Voluntary Overtime Versus Mandatory Overtime
The Arizona Court of Appeals a court should not disregard all overtime wages when calculating gross income, regardless of the nature of the overtime.
The court ruled that the Guidelines intended to exclude only non-mandatory or voluntary overtime from gross income.
The appeals court also reviewed the trial court using a higher income than what he earned at trial.
He had voluntarily reduced his work schedule from eighty hours per week to sixty-four hours approximately sixteen months before trial. However, 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 total earning capacity.
Shane again asserts that a parent works at total earning capacity when they work forty hours per week. 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” when deciding whether to use actual income or earning capacity when a parent voluntarily reduces their income.
The court should consider the financial impact on the children, the reasonableness of the parent’s decision, and whether the parent decided in good faith.
In this case, Shane did not terminate his employment but only reduced his work schedule and worked sixty-four hours per week.
Court Should Apply a Balancing Test to Overtime When Determining Income
However, the court cautioned 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 ruled earning capacity is the work schedule that occurred during the marriage. Even if the regimen were extraordinary, requiring excessive hours or a demanding work schedule, that rule would apply.
A parent’s earning capacity should be measured by the standard of an objectively reasonable work schedule rather than one requiring excessive hours.
Determining 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.
The appellate court decided the trial court did not state any reasons for attributing sixteen additional hours to Shane’s weekly schedule. 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 over 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. He claimed the cour infringed on his fundamental right to decide the terms of his private employment and, therefore, how he utilizes his time.
He cited no authority to establish a forty-hour workweek is used to calculate child support, and the court knew of none.
The justices found Shane was not treated differently from other divorced parents because 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 Credits 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 require allocating federal tax exemptions for the children that approximates the percentages of the parent’s support of the children.
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. They directed the trial court to distribute the exemption on remand.
Determining the gross income of a non-custodial parent is essential to calculating their child support obligation.
This case demonstrates that a parent working overtime 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. As long as said overtime is part of a regular schedule, the court will use it as part of their calculation.
However, suppose the parent changes their regular work schedule during or shortly before the court hearing. In that case, the court must be careful not to attribute too many or too few 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
Another issue is using tax-free income to calculate child support in Arizona. In Arizona, the Arizona Child Support Guidelines determine child support calculation.
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 a tax-free income stream, 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 change from living primarily with Mother to living primarily with Father.
Calculating Child Support Using Taxable Income Versus Non-Taxable Income
The parents, however, disagreed 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. The trial court disagreed with Mother and used Father’s non-taxable income and Mother’s taxable income to calculate the child support the court ordered her 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 claimed that by failing to “gross-up” the father’s income, she is paying more child support than she should be.
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 consider 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. Instead, he claimed the Guidelines permitted a court to deviate child support instead of “grossing up” non-taxable income. Father argued the trial court did not feel it was necessary in this case. He also argued that requiring a trial judge to “gross-up” his income would overly complicate child support calculation in Arizona.
A Judge May Not “Gross-Up” a Parent’s Earnings Under the Guidelines
The Court of Appeals held a judge is not required to “gross-up” non-taxable income when calculating child support in Arizona. The Appeals Court pointed 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 held that avoidance of taxation is not a source of income but is, instead, simply a cost-saving.
The Court of Appeals ruled child support calculations would be unduly complicated if a judge had to “gross-up” non-taxable income when calculating child support. That problem would create inconsistent results in child support cases in Arizona.
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 consider different tax treatments for capital gains, personal injury awards, interest earned from government bonds, unemployment benefits, and the like.
Child Support Deviation instead 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 while 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 could 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 Father’s non-taxable income warranted a deviation in child support.
You should seriously consider contacting the attorneys at Hildebrand Law, PC, if you have questions about child support in Arizona. 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 complete our appointment scheduling form to schedule your personalized consultation and turn your child support or family law case around today.
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Chris Hildebrand wrote the information on this page about calculating income for child support in Arizona to ensure everyone has access to information about the divorce process in Arizona. Chris is a family law attorney at Hildebrand Law, PC. He has over 24 years of Arizona family law experience. He has received multiple awards, including US News and World Report “Top Arizona Divorce Attorneys”, Phoenix Magazine “Top Divorce Law Firms”, and Arizona Foothills Magazine “Best of the Valley” award.