The Child & Dependent Care Tax Credit and Support
Most who have dealt with child support issues will be familiar with Section 20-108.2 of the Virginia Code. Most will also be familiar with subsection F, which deals with work-related child care. Less familiar though is the last part of that subsection, which reads as follows: “Upon the request of either party, and upon a showing of the tax savings a party derives from child-care cost deductions or credits, the court shall factor actual tax consequences into its calculation of the child-care costs to be added to the basic child support obligation.”
I have yet to see this passage applied in practice. This absence is doubly confusing given the “shall factor” mandate.
Fine, surely one can find a plethora of caselaw on its application...right?
Not that I have been able to discover. In the interest of full disclosure, I won’t pretend that I’ve spent hours pouring over research. I pretty much limited my hunt to Fastcase searches for that section/subsection, along with the “showing of the tax savings” quoted language. Still, given that support is a heavily litigated topic, one would expect some case to pop up, especially for a section that appears likely (to me, at least) to have a substantial impact on support calculations.
So how does one interpret and use this? I really don’t know, and what follows is just my best stab at it.
My guess is that the “tax savings” language refers to the Child and Dependent Care Credit. Masochists out there can read all about this in IRS Publication 503. As I, a non-accountant understand it, there are a series of tests to see if one even qualifies to claim the credit. For this post, let’s pretend we’ve jumped through those hoops and passed the qualification hurdle. Now, how much sweet, sweet lucre is there to be had?
Oh, we get to figure out “adjusted gross income”, otherwise known as “that thing your accountant figures out for you.” Since life is short, we'll just refer to it as "AGI" from here on out. Ok, time for some math. I’m going to gloss over quite a lot to keep this example as easy as possible. Clearly it would be a bad, bad idea to do that in an actual case.
We’ll start with W-2 income for our hypothetical separated/divorced parent with two children. Make that $40,000.00, a nice round number. Our fictional parent pays $500.00 per month in work-related child care for a yearly total of $6,000.00. The dollar limit for two qualifying children appears to be $6,000.00 per year, so yes, that’s a conveniently-chosen number. We won’t fiddle with the “reduced dollar limit” for this example. If we could just stop here, it would seem so very easy.
But alas, now it’s time for that aforementioned AGI. To do this correctly, we would need our hypothetical parent’s total gross income minus certain specific deductions. To do this easily (distinguishable from “correctly as is often the case) for the purposes of this post, we just need to make up a number. Let me remind you again: not an accountant, not giving tax advice, just performing a thought experiment. I think $34, 900.00 sounds like a nice AGI, so we’re using that. We now go back to the handy chart on page 12 of Publication 503. Our AGI is more than $33,000.00 but less than $35,000.00, so our hypothetical parent may claim 25% of $6,000.00 limit for a total of $1,500.00. Since we calculate child support from monthly income, I suspect we’ll need to convert that yearly $1,5000.00 tax savings to $125.00 per month.
Wait, we’re not finished yet. We’ve found the federal tax savings. What about the state? Virginia appears to use the dollar limit and not the actual percentage of the credit as used on the federal taxes. If that’s the case, our hypothetical parent gets to claim the full $6,000.00 in Virginia (not the reduced $1,500.00). The $6,000.00 in yearly Virginia tax breaks works out to $500.00 per month.
Our $125.00 monthly federal benefit and $500.00 Virginia benefit total $625.00 per month in tax savings, quite a substantial amount. Such an amount would definitely be enough to move the needle in a support calculation.
So, how does one use this?
I don’t really know. I suspect that in a situation in which our hypothetical parent’s income has been stagnant for a few years, one could use his or her past tax returns to figure out what we calculated above. For fluctuating incomes, the answer appears less straightforward. That’s also another way of saying “I am finished pondering this for the moment.” If anyone has dealt with this issue and has any suggestions or insights, I’d love to hear them.