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Wednesday, February 4, 2015

How is Bonus Income included in calculating Child Support and Alimony?

The Alimony Reform Act defines income to include all income as defined by the Massachusetts Child Support Guidelines which clearly includes bonuses in the list of included income.  In Zaleski v. Zaleski, the SJC remanded the issue of alimony in part because the lower court did not include bonuses in the alimony calculation.  Bonus income, therefore, has to be addressed, but that does not mean it's easy to deal with.

Bonuses often vary from year to year so basing a support amount on a specific number could result in an inequity to either the payor or recipient.  Making adjustments periodically presents its own problems as well, requiring a detailed agreement to ensure that the self-modifying calculations are simple enough to avoid future disagreement.  In addition, so-called self-modifying orders have been rejected by the SJC in Hassey v. Hassey, so this is only an option if parties are able to agree.

While this is not a simple question, it doesn't mean you have to reinvent the wheel.  There are numerous common options to deal with bonus income, and it it is worth spending time discussing what both parties prefer and some of the advantages and disadvantages of each.  Below are four common options for dealing with bonus income.  They are presented in no particular order.  This is not an exhaustive list but probably the most common options:

 Retroactive Adjustment  (option A)

Choose a current estimate of annual bonuses to include in the child support calculation.  Exchange w2s and 1099s the following year and then recalculate the child support guidelines. If the recalculation shows a higher than expected figure, then payor pays recipient the difference of what should have been paid in a lump sum.  If the recalculation shows a lower than expected figure, then recipient repays payor the overpayment made in a lump sum.

Advantages and Disadvantages: This type of self-modifying provision can only be done by agreement, but it has the advantage of including changes to the recipient's income.  While this option has the advantage of seeming fair by counting all of the income, it can create disagreements and complications whenever the parties have to recalculate.  If the parties fail to complete the recalculation as required then this also creates potential retroactive issues going forward.

Questions for Option A: When does the Recalculation happen and how long does the person have to pay the adjustment?  What if the recalculation is so significant that the person can't make the adjustment payment in a lump sum?  Are their consequences built into the agreement if one person doesn't provide their w2s and 1099s timely?  Does the payment going forward change after the recalculation?

Effect on DOR collection of child support: DOR would not be able to collect the adjustment without a new court order.

Prospective Adjustment (option B)

Choose a current estimate of annual bonuses to include in the child support calculation.  Exchange w2s and 1099s the following year and then recalculate the child support guidelines. The recalculated figure is the new figure for the following year.

Advantages and Disadvantages: Much like Option A this type of self-modifying provision can only be done by agreement, and it has the advantage of including changes to the recipient's income.  While this option has the advantage of seeming fair by counting all of the income, it can create disagreements and complications whenever the parties have to recalculate.  If the parties fail to complete the recalculation as required then this also creates potential retroactive issues going forward.

Questions for Option B: When does the Recalculation happen?  Does a bonus paid in January affect the recalculation or only count in the following year's recalculation?  Are their consequences built into the agreement if one person doesn't provide their w2s and 1099s timely?

Effect on DOR collection of child support: DOR would not be able to collect the adjustment without a new court order.

% Percentage of Bonus (option C)

Use only the base salary in the child support calculation.  Upon receipt of a bonus, payor provides recipient evidence of the bonus and pays a percentage within a designated period of time.

Advantages and Disadvantages: This option has the advantage of being simple, but it may be difficult for the recipient to verify that the information being provided by the payor is correct.  In addition, this doesn't take into account if the recipient receives a bonus.  This option also forces the recipient to depend on support based on the base income only on a week to week basis, which may require a change in lifestyle.

Questions for Option C:  What is the percentage? Are their consequences built into the agreement if payor doesn't provide the bonus timely?   What happens if recipient's income goes up, does that affect the bonus sharing? Should parties still exchange w2s and 1099s the following year?

Effect on DOR collection of child support: DOR would be able to collect the base support but not the bonus portion.

No Adjustment until new Modification (option D)

Choose a current estimate of annual bonuses to include in the child support calculation.

Advantages and Disadvantages: This option has the advantage of being very simple and require the least amount of ongoing interaction between the parties.  However, if the bonus changes significantly from the estimate used in the calculation than one of the parties is receiving a windfall, and that would not change until one of the parties requests that they revisit the calculation.

Questions for Option D:  Should parties still exchange w2s and 1099s the following year?

Effect on DOR collection of child support: DOR would be able to collect the support.  Any change would require a new court order.

Other questions to consider:

With any of these options there are additional questions that bonus income may raise.  In the Zaleski case, for example, the payor was also paying for private school for the children, and the SJC implied that the lower court might use that fact as a reason to exclude the bonus from the calculation.  Similarly, parties might agree if bonus income is not something they typically count on for maintenance of their base lifestyle that a portion of it could be used for savings purposes, such as college savings.

In addition, with any option that includes recalculation, it's important to have a lot of detail.  For example, if the bonus plus existing income exceeds total income of $250,000, the child support guidelines are not clear how they apply to the income over $250,000.   This doesn't mean the court doesn't consider that income, but that the Court has a lot more discretion in how to handle that income.   How do the parties want to treat the additional income in these situations?  If they are going to recalculate, then they may want to use a specific formula for this portion of the income as well.

Click here for more information on child support and alimony in Massachusetts.

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