Pursuant to the Tennessee child support guidelines, a parent’s child support obligation is calculated based upon the monthly gross income for each parent. This method has been used since 2005 when Tennessee legislature passed the income shares model, which takes into account both parent’s earnings, as well as work-related child care expenses and health insurance premiums paid on behalf of the minor children. In domestic law practice, attorneys may run into a situation where a party receives income that is not taxable. In this issue, we will be looking at how to treat a party’s non-taxable income for purposes of child support. In other words, should a party’s non-taxable income be “grossed up” for the purposes of setting a child support obligation?
As a practitioner you must be able to recognize various types of income that may be non-taxable. Military members’ base pay is subject to both federal income tax and Federal Insurance Contributions Act (FICA). However, many service members receive Basic Housing Allowance (BAH) and Basic Allowance for Subsistence (BAS). Neither of these allowances is subject to federal income tax or FICA. With the amount of service members in the middle Tennessee area, this issue can come up on a frequent basis.
Furthermore, those receiving private disability insurance payments usually do not pay income tax on the payments received. In some cases, a party may be receiving monthly gifts from family members. There may be other instances in which a party receives tax-free income. As a practitioner, be on the lookout for these types of situations.
The question then becomes, why would additional income be imputed to a party receiving non-taxable income? The child support guidelines assume that “all income is earned income subject to federal withholding and the Federal Insurance Contributions Act (FICA/social security).” Tennessee Child Support Guidelines 1240-2- 4-.03(6)(b)(2)(i). In other words, when you put a party’s income into the child support worksheet, it is assuming that the party will be paying federal withholding and FICA from their gross income. If the income is not subject to those taxes, the party is receiving an assumption in the child support calculation that is not present.
This issue has been specifically addressed in the Tennessee case of Wade v. Wade, 115 S.W. 3rd 917 (TN Ct App. 2002). In Wade, the father was a service member receiving BAH and BAS tax-free. The Tennessee Court of Appeals held, “Accordingly, where a military member receives pay or allowances which are not subject to taxation, an amount must be imputed on top of the amount actually received in calculating gross income for purposes of calculating the service member’s child support obligation under the Guidelines.” At 923. However, Wade was decided prior to the “income shares” model being adopted in Tennessee. I have reviewed the citing references for Wade and have been unable to find any cases since the implementation of the income shares model that negatively address the Wade decision.
In fact, trial courts in the middle Tennessee area have implemented the “grossing up” of non-taxable income in similar situations. I have seen this done both with an individual obligor who received nontaxable private disability benefits and an individual who received monthly gifts from his parents. Neither of these decisions were appealed. However, there does seem to be a trend to impute additional income in these types of situations.
Due to the nature of the calculations needed to impute additional income, it may be wise to enlist the services of a certified public accountant. That way, both you and the trial judge will know the calculation was done correctly. Joshua L. Rogers