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Calculating child support awards: new opportunities for CPAs.

CALCULATING CHILD SUPPORT AWARDS: NEW OPPORTUNITIES FOR CPAs

Lee G. Knight, PhD, and Ray A. Knight, CPA, JD, professors of accounting, Middle Tennessee State University, Murfreesboro, describe what CPAs need to know to enter an emerging field.

CPAs seldom find new service opportunities in nontax federal legislation, especially if its objectives are of a social welfare nature. The Family Support Act of 1988 (FSA), however, was an exception to this rule. The FSA gave CPAs new opportunities and responsibilities in an area previously considered outside their realm--the calculation of child support awards.

All states, as well as the District of Columbia and the territories of Guam, Puerto Rico and the Virgin Islands, now have their own formulabased child support guidelines to determine child support awards and wage withholding and to modify previous awards. CPAs should find a need for their expertise in translating the child support guidelines into hard numbers.

FSA PROVISIONS

The FSA required each state to establish guidelines for setting child support awards and directed judges and other officials to ensure such awards follow established state guidelines unless there are extenuating circumstances. It also strengthened earlier wage withholding procedures, mandating that states provide for immediate wage withholding (without determining whether there is an arrearage) unless there is good cause not to require withholding or both parents agree in writing to an alternative arrangement.

KEY ISSUES

The act afforded states anq other jurisdictions considerable discretion in creating guidelines. All jurisdictions, however, basically faced the same issues. Among those of greatest interest to CPAs are:

1. Whose income and needs should be taken into account when establishing child support awards?

2. What definition of income should be used in calculating the award?

3. How should special circumstances, such as shared or split custody, visitation time, multiple families, extraordinary expenses and medical insurance, be taken into account?

4. How should voluntary or stipulated agreements not conforming to the guidelines be handled?

WHOSE INCOME?.

There are four basic models of child support guidelines on whose income and needs should be considered in establishing a child support award: income shares, fixed percentage of noncustodial income, varying percentage of noncustodial income and Melson Delaware.

Income shares model. The most widely used model is income shares, which has two fundamental assumptions:

1. The support should be based on both parents' combined income.

2. The child should receive the same proportion of parental income that he or she would receive if the parents lived together.

Percentage of income models. Both fixed and varying percentage of noncustodial income models assume the custodial parent's income already is used for child support and the child should receive support from the noncustodial parent. The fixed percentage model calculates the award as a fixed percentage, determined by the number of children covered, of the noncustodial parent's income. The varying percentage model alters the percentage according to the noncustodial parent's income level. Calculations for these models are considerably less burdensome than for the income shares model. Some jurisdictions even include tables in their guidelines to facilitate computation of award determinations.

Melson Delaware model. This model, developed by Judge Edward F. Melson in the Delaware family court in 1979, incorporates the estimated cost of raising a child, plus a minimum reserve for the parents, into a relatively complicated formula. A primary support obligation is calculated and then allocated between the parents on the basis of their net incomes.

Exhibit 1, below, shows which jurisdictions use each model.

WHAT IS INCOME?

The issue of how income should be defined when calculating support raises both philosophical and pragmatic issues. For example, should someone be expected to be fully employed? Should deductions be given for taxes paid? How these and other related issues have been resolved can be organized around three sets of questions:

* Whose income, other than the parents', should be included in the income base, and what level of employment should be used?

* What types of income shotfid be included in the income base?

* How should very high and very low income levels be handled?

Sources of income. While guideline models indicate whether both parents' or only the noncustodial parent's income should be included in the support calculations, they do not address other sources of income issues. For example, to what extent should the child's income or a new spouse's earnings be included in the income base? Similarly, should income be imputed for a parent who is underemployed? Considerable variety is found on these issues; in many jurisdictions, the guidelines merely call for them to be addressed on a caseby-case basis.

Types of income included in base. This is the most important variation among the guidelines--and one particularly important to accountants calculating support awards. All jurisdictions basically start with gross income, which is spelled out in detail in many of the guidelines but parallels gross income reported on the parent's tax return (see exhibit 2 at fight).

From there, the jurisdictions have adopted one of three perspectives: (1) gross income with no deductions allowed, (2) adjusted gross income, which allows deduction of certain costs, such as prior support orders and (3) net income, which permits deduction of taxes and deduction of other costs, including those costs permitted in calculating adjusted gross income.

Extremely high and low incomes. Many jurisdictions exempt from the guidelines those individuals with income above or below certain levels. On the upper end of the spectrum, some place a maximum limit on either the award or income amount considered in establishing the award. Other jurisdictions' income charts simply end at a certain level, implying or saying that income above the top level is to be handled on a case-by-case basis.

At the lower end, many jurisdictions stipulate a minimum award applicable when the noncustodial parent's income level falls below the poverty level.

Special circumstances. Several jurisdictions have tried to incorporate some of the more common variations-extraordinary expenses, shared or split custody, extended visitation, subsequent families and medical insurance costs--into their guidelines. The remaining jurisdictions apparently leave these issues to the courts.

Voluntary or stipulated agreements. Voluntary or stipulated agreements that do not conform to state guidelines are an issue of increasing concern, but they have not yet been addressed by most jurisdictions. Jurisdictions that have addressed them have adopted one of two perspectives: (1) apply the guidelines to all awards, including voluntary agreements, or (2) if the parties voluntarily agree to an award, inform them of the suggested guideline amount.

OPPORTUNITIES FOR CPAs

Both the FSA and the state guidelines charge the courts with determining child support awards. Trained legal personnel, however, may not be comfortable with the terminology and calculations involved in establishing such awards. CPAs, on the other hand, not only are familiar with the income terms in the guidelines but also are accustomed to makingthe types of allocations and imputations often called for. CPAs also have expertise verifying and documenting the accuracy of numbers used in the calculations, essential prerequisites if the courts are to establish just and equitable child support awards.

CPAs will have to do some preliminary work to take advantage of these new opportunities. It's important, first, to review and fully understand state guidelines and to become familiar with the peculiarities of the necessary calculations.

Most of the guidelines can be secured from the state's child enforcement agency, regardless of which branch of government created them. Unfortunately, the location of these agencies varies by state. Some are located within the attorney general's office, while others may be found in the department of human services (or some similarly titled state agency). Additionally, some personnel in these agencies may believe the guidelines consist of tables alone, since that is what they are accustomed to using. CPAs, however, will need the full guidelines to understand fully how to calculate income numbers that form the basis for such tables.

MARKETING ONE'S KNOWLEDGE

Once familiar with the guidelines, CPAs must market their expertise to those who will use it: judicial officials directly involved in establishing support awards and attorneys who represent parties to child support agreements. Existing legal contacts, particularly family law or domestic relation specialists, may provide access to these individuals. If not, another possibility is to contact the state bar association for a list of the judicial officials and legal specialists who are likely to be involved in child support cases.

Even CPAs who will not be offering their services to the courts and attorneys still may be affected by the FSA because of the new child support withholding requirements. As of November 1, 1990, employers of a noncustodial parent must execute child support withholding immediately, rather than waiting until an employee is in arrears on child support payments. Failure to comply with this withholding requirement within 14 days of receiving court notice of the award will result in penalties determined by each state's law. CPAs involved with payroll in an advisory capacity or otherwise, therefore, must become familiar with the applicable child support terminology and learn how to review court writs authorizing child support withholdings.

MORE OPPORTUNITIES THAN EXPECTED

The FSA provides substantial new opportunities for CPAs in determining child support awards. To take advantage of these opportunities, practitioners should examine their states' child support guidelines and then offer their expertise to courts and attorneys grappling with this complex child support legislation.
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Author:Knight, Ray A.
Publication:Journal of Accountancy
Date:Nov 1, 1992
Words:1545
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