In a previous blog post, we had cautioned against using online calculators for child and spousal support. It has become common for many websites to provide calculators for divorcing parties to use so as to determine what their child and spousal support obligations, or entitlement, might be. However, as we cautioned in our prior blog post, these calculators are potentially risky in the sense that they can only provide you an answer on the basis of the income that you input. The difficulty arises in the sense that the websites do not engage in any analysis of what the proper income for support purposes might actually be.
As a result, and without further information being provided, parties will often simply input the income listed at Line 150 of their tax returns. However, this can often lead to incorrect results, depending on what sources of income make up the Line 150 total, and lead to prejudice to either party.
In order to the show the risks that can arise, we provide the following example:
Two parties, Roger and Judith, are separating after 15 years of marriage, with two children under the age of 18.
Roger’s Line 150 shows his total annual income for 2018 as $200,000. Judith has a Line 150 Total Income for 2018 in the amount of $50,000.
Simply using these numbers as the proper income for support calculations would result in Roger paying Judith:
- Section 3 Child Support in the amount of $2,793 per month;
- Spousal Support in a range of $2,034 to $3,218 per month with a mid range of $2,626 per month;
- 80% of all Section 7 expenses.
The above is pretty straightforward and are the results taken from a Website that advertises a Child and Spousal Support Calculator. However, this website does not provide any information as to how parties should be calculating the incomes that are inputted into the calculator.
The issue of how income is calculated is important, because, as will be shown below, it can lead to very significant changes in the support results.
For instance, revisiting the example of Roger and Judith, lets assume that the entirety of Roger’s income consists of dividend income. Because the dividend income listed on a tax return is not the actual amount of dividends received and has been grossed up to approximate the before-tax amount that the corporation paying the dividend had to earn in order to remit tax to the government and pay the after tax profit to Roger. As a result, the amount that is listed in Roger’s tax return at Line 180 (for non-Eligible Dividends) is actually inflated and not representative of his actual income for support purposes. As a result, and pursuant to the Child Support Guidelines, support has to be calculated on the basis of his actual dividends received, not the grossed-up amount that is used to calculate his Line 150 total. In this case, using the class of non-Eligible Dividends, $200,000 of grossed up dividends is equivalent to actual dividends in the amount of $172,414.
Using this new number will clearly reduce Roger’s child support obligation as his actual income for the calculation of child support is now lower, to the extent that he will be paying $2,429 per month in child support. However, for the calculation of spousal support, it is not so simple as just inputting this amount of “Actual Dividends” into an online child support calculator. This is because online calculators will treat this amount as “employment income” and assume that it receives tax treatment as per employment income. However, this would result in further incorrect calculations.
For instance, using the same online calculator as before, the spousal support would be reduced to a range of $1,379 to $2,477 per month for Roger to pay. But this is based on the characterization of Roger’s income as being “salary” and therefore being taxed much higher than dividends. More specifically, at a salary of $172,414, Roger would have a combined tax burden (after accounting for deductions) in the amount of $48,088. However, if Roger received the entirety of his $172,414 in non-eligible dividends, his tax burden would only be $28,790. Because the spousal support calculation includes the taxes paid by both parties, this greatly changes the range of support to the extent that with this lower tax burden, Roger’s spousal support range would increase to between $2,226 to $3,431 per month. This is quite a difference from his spousal support obligations when the $172,414 is treated as “salary” by the online calculator.
As a result, the online calculators are not always able to actually provide accurate calculations for support and can lead to parties being hugely misinformed.
As another example, lets assume that the entirety of Roger’s income is received from Capital Gains. In this case his reported Capital Gains are $200,000. However, this is incorrect for the purposes of calculating support. This is because Capital Gains receive preferential tax treatment from the Government such that only half of the Capital Gains received by a party are subject to tax. For this purpose, when calculating a party’s Line 150 Total Income, the entry for Capital Gains only includes half the actual amount of Capital Gains received by the party. As a result, and opposite to the treatment of Dividends, Capital Gains must be “grossed up” to reflect that actual cash amount of Capital Gains received by the party.
In this case, if Roger’s Line 150 is $200,000 and consists entirely of Capital Gains, this means that his actual income for Support Purposes is equivalent to $400,000. This creates a significant change to his support obligations to the extent that his Child Support would not be a monthly obligation of $5,433 and his spousal support obligations would range from $11,589 to $14,040 per month.
Similar to the issue with dividends, the above numbers were calculated on spousal support accounting for the preferential tax treatment of Capital Gains. As the vast majority of online calculators that we have reviewed only allow for parties to input “Gross Income” these calculators cannot properly account for different tax treatments of different sources of income and therefore lead to grossly inaccurate results. For instance, simply grossing up Capital Gains from $200,000 to $400,000 and then using that income in the same online calculator results in a spousal support range of $6,350 to $8,467. This is as a result of the calculator treating the inputted income as “salaried” income and therefore assuming an incorrect tax rate on the income.
As is clear, the failure of the online calculators to distinguish between different sources of income and difference tax treatment can be highly prejudicial to the parties – in the last example above, had Judith and Roger used the online calculator that we were using, Judith could have potentially agreed to receive monthly spousal support some $5,000 less than she could perhaps be otherwise entitled to.
Online calculators can be useful for doing very quick and simple calculations. However, given their very simplistic programming and failure to account for a number of complicated conditions and factors relating to the differences in calculating income for tax purposes and for support purposes, and in respect of the online calculators’ inabilities to account for different tax treatment on different sources of income, online calculators can also be very dangerous when they have the significant potential to provide entirely incorrect results and answers. This is even more concerning given that a number of these online calculators are embedded in webpages for Family Law Firms. This is so because by virtue of the calculator effectively being endorsed by a Family Law Firm, it communicates to the users that the calculator is accurate and will provide accurate results. However, as is seen above, by using an online calculator from a Family Law Firm the results are grossly inaccurate and can result in serious prejudice to either party depending on the circumstances.
At Mincher Koeman, our lawyers are trained in, and have significant experiences, in the often-complex area of calculating income for support purposes. We engage in twice-per-year training in calculating income in the complex and nuanced area of child and spousal support. We pride ourselves on our deep understanding of all the factors that go into determining proper and accurate support entitlement and obligations, and take the time to explain to our clients all the considerations involved in calculating income and support. If you require assistance in a matter related to child or spousal support, or need assistance in determining your or your ex-partner’s income we can help. Give us a call at (403) 910-3000 or email us at firstname.lastname@example.org.