Tag Archives: child support

Requirements for a Colorado Prenup

We want prenup! Yeah, it’s something that you need to have. – Kanye West in “Gold Digger” (feat. Jamie Foxx)

Kanye West’s wedding to Kim Kardashian apparently was delayed because of negotiations over their prenup. Here in Colorado, a revision to the Pre-Marital and Marital Agreement Act will become effective in July. The below are the key components to a pre-marital (aka prenup) agreement.

  1. In writing and signed by both parties
  2. Voluntary (one party cannot force the other into the contract)
  3. Disclosure of assets and liabilities
  4. Cannot limit or waive child support
  5. May not violate public policy

In coming posts, we’ll talk about ways that a prenup can be attacked and the changes to Colorado’s new law that becomes effective in July.

Child Support and Taxes

Tax season is upon us and I’ve been getting a lot of questions about child support and taxes. First, Colorado child support is generally not taxable. Unlike maintenance/alimony, the payor of child support cannot deduct paid child support from their taxable income. Similarly, a parent receiving child support need not report that money on their tax return.

Second, a minor child can be claimed as a dependent on a parent’s tax return. Who gets the dependency exemption? Pursuant to C.R.S. 14-10-115(12), the Colorado court is required to allocate the right to claim a child as a dependent in proportion to the parents’ contributions to the costs of raising the child. If a mother has more parenting time than the father and she pays for the child’s sports, tutoring, health insurance, daycare, etc., the court will likely give her the right to claim the child as a dependent.

Nevertheless, the parties can always voluntarily agree on which parent gets to claim a child in a particular year. Although Colorado has done away with the term “custody” in favor of “parenting time,” the IRS predictably is behind the times. The “custodial parent” matters for IRS purposes and is defined as the parent with the most overnights. Because there are an odd number (365) of days in a year, one parent will almost always have more than the other even when they are “50/50 parents” or have “equal time.” That parent is then the “custodial parent” under the current IRS regs and the one eligible to claim the child as a dependent. There are times when the IRS regs conflict with the Colorado law on who gets to claim the child as a dependent. As a result, it is usually a good idea for parents to sign IRS Form 8332 along with their divorce or allocation of parenting rights agreements to ameliorate any issues down the road if the parties agree to split the right to claim a child on future tax returns.

In addition to the dependency deduction, the current tax code allows for a separate deduction for work-related day care and a credit (different from a deduction) for each child. The rules on those deductions and credit are complex because they hinge on the taxpayer’s income and other factors. Tax laws change all the time and my advice is always for a client to consult with a CPA or tax attorney before signing a deal.

Although parties going through a Colorado divorce or dispute over parenting rights often times will disagree about the color of the sky on particular day, there are times when it makes sense for them to strategically work together on taxes. For example, if one parent cannot benefit from the tax credit because they make too much money, they can offer to give the other parent the right to claim that child and split the amount of the credit. It results in a “win-win” for both parents. It is rare to characterize anything as a “win-win” in a Colorado divorce or when discussing anything related to taxes, but it is possible if the parties have thoughtful divorce lawyers and CPAs.

Voluntary Unemployment for Colorado Family Law

Voluntary unemployment is when an award of spousal maintenance or child support is based on imputed income that is not actually being earned by a parent or former spouse. The same concept applies whether the person is completely unemployed or working below their true earning capacity, i.e. “underemployed.” Voluntary unemployment frequently comes up in Colorado divorces where maintenance is at issue or any case involving child support.

Both parents are obligated to support their children. If one parent isn’t earning as much as they could, the child suffers. A party may lack the initiative to find or keep work. They may be purposefully turning down work to spite the other party. Whatever the reason, they are shirking their obligation to support the child. The policy of spousal support vis-a-vis maintenance (alimony) is no different.

The dispute comes down to (a) whether a parent is making less than what they should be, and (b) what is the potential income for the parent. A few examples may help.

  • In re Marriage of Bregar – court imputed income to former lawyer who had started a cattle ranch.
  • In re Marriage of Yates – imputed income based on former pay rate when father was involuntarily terminated from job, but turned down jobs that required travel.
  • In re Marriage of Elmer – licensed attorney imputed income because he decided to pick apples at $10/hour.
  • In re Marriage of Zisch – mother with teaching certificate was imputed income even though she testified that she was actively looking for a full-time teaching position.

Exceptions

Under Colorado law, there are a few notable situations where a court cannot impute income based on a parent or former spouse being unemployed. These exceptions are listed below:

  1. A party is physically or mentally incapacitated.
  2. A parent is caring for a child under the age of 30 months.
  3. A parent that is in prison for 1+ years.

Similarly, a party will not be underemployed if:

  1. They’re working in a position that is temporary and reasonably intended to result in higher income in the foreseeable future; or
  2. They’re job is a good faith career move that isn’t intended to deprive the other party of child support. The lower position cannot unreasonably reduce the support available to a child; or
  3. They’re in an education program that will likely result in higher income within a reasonable period of time.

Calculating Imputed Income

As previously discussed, Colorado law is fairly specific in determining a party’s income. How should a court calculate income when a party is unemployed or underemployed? Case law suggests that a court can use past earnings, education level, or wages of an average person with similar qualifications in finding the appropriate amount of income for calculating child support or maintenance.

Colorado divorce attorneys have multiple arrows in their quiver when handling a case involving allegations of underemployment or unemployment. Using employment statistics from the department of labor or formal discovery requests can break a case. Familiarity with the judge presiding over the case will drive the strategy behind the presentation of evidence and line of argument.

What is “Income” for Child Support and Maintenance in a Colorado divorce?

To kick off our multi-part series on Colorado’s new law on spousal maintenance (alimony), we first started with a general overview of the guideline formulas in C.R.S. 14-10-114. Next, we considered when a spouse going through a divorce is eligible for maintenance under the “threshold test.” Now we turn to “income,” a benign term that on its face appears to be relatively simple. As detailed below, determining income for a party in a Colorado divorce can be complicated.

Before the recent amendments to Colorado’s law on maintenance, C.R.S. 14-10-114, it was unclear how a court should determine income for cases where long-term, i.e. permanent, maintenance was requested or the parties annually made $75,000 in total. Colorado divorce attorneys relied on inferences in the maintenance statute to the more specific definition of income for child support and cases such as In re Marriage of Swing. And even relying on the definition of income for child support proved to be problematic when a party was self-employed or was part of a partnership or close-held corporation.

Fortunately, however, the General Assembly clarified what exactly is “income” in determining both maintenance and child support in Colorado. Starting on January 1, 2014, the amount of income that is used in the Child Support Worksheet or Maintenance Guidelines is the same.

The first concept that must be understood is the difference between gross and net income. Gross income is before taxes and deductions like health insurance or 401(k) contributions are taken out. Net income is the money left after taxes and deductions; the amount a salaried employee gets if they do direct deposit. In Colorado, gross income is what matters for maintenance and child support.

“Gross income” includes the following:

  • Income from salaries
  • Wages
  • Tips declared to the IRS or imputed by the court
  • Commissions
  • Payments received as an independent contractor
  • Bonuses
  • Dividends, capital gains, trust distributions, annuity payments and interest
  • Rents
  • Social security, workers comp, and disability benefits
  • Gifts, including from family members
  • Expense reimbursements or in-kind benefits such as free housing, food, transportation, etc.
  • Moneys drawn by a self-employed individual for personal use that are deducted as a business expense

The above is not an exhaustive list. And income does not include child support payments received, or money received from additional jobs or work beyond 40 hours per week.

Things get tricky when a party is self-employed or involved in a partnership or closely-held business. Generally, income for someone self-employed or an owner of a small business is calculated by taking the gross receipts/revenue and subtracting “ordinary and necessary expenses.” That last term is where parties frequently disagree on whether an expense is a legitimate business deduction. The debate doesn’t end with a cursory review of a tax return.

People frequently run much of their personal expenses through their business because the risk of an audit by the IRS is somewhere in the neighborhood of 1%. For example, a self-employed project manager may deduct his entire monthly cell phone bill or gas expenses even though he undoubtedly uses his cell phone for personal use, or drives up to Aspen on a weekend to ski. He may not get caught by the IRS, but a competent Colorado divorce lawyer will successfully argue that his income is higher for analyzing maintenance and child support.

Finally, the amendments to Colorado law clarify how income is determined for a “silent partner” or someone that owns part of a business, but isn’t a manager. In that scenario, income for maintenance and child-support purposes may be limited to actual cash distributions. That income may be lower than merely taking the gross revenue of the company and reducing by ordinary business expenses.

We’ll continue our discussion on Colorado maintenance (alimony) and child support by examining voluntary unemployment or underemployment.