The Fiscal Cliff and You – PA Child Support and The American Taxpayer Relief Act of 2012

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You may recall being inundated with news stories about the impending… [cue foreboding music] – “the fiscal cliff” while you were frantically finishing last minute holiday shopping this year.  But what was the big deal exactly, and what has happened since then? Did we fall off the cliff? and who cares?

Well, if you have a Pittsburgh child support order that was entered in 2011 or 2012, youmight have been directly affected by fiscal cliff fiasco and not even know it!

In late February 2012, the term “fiscal cliff” was coined by a most unlikely source. Chairman of the U.S. Federal Reserve (“the Fed”), Ben Bernanke, who is usually known for his even keeled, anti-hype approach to fiscal politics, popularized the ominous term to refer to the upcoming deficit reduction (read: simultaneous increase in tax rates and decrease in government spending through sequestration that was due to go into effect in January 2013). Forecasters estimated that “falling off the fiscal cliff” would have led to higher unemployment and a mild recession. But despite the potentially devastating effects of failing to avoid the cliff, we nevertheless tumbled right off on December 31, 2012.

Luckily, in the thirteenth hour (which seems to have become the new normal for congress) the American Taxpayer Relief Act of 2012 was passed, averting a devistating increase in income taxes. Although the new law avoids the most dramatic take hikes, it nevertheless ushers in a tax increases of its own that may directly affect child support obligations entered and/or modified in 2011 or 2012. The Fiscal Cliff tax legislation makes a litany of changes to the Internal Revenue Code, including the following:

  • The 39.6% tax bracket was restored for tax payers who earn more than $400,000 per year ($450,000 for joint filers) – this represents an increase of 4.6% for people who earn more than $400,000, amounting to as much as $18,400 per year or $1,433 per month. For parents who have one child, the child support guideline might be greater than 11% of net income, so the tax hike might justify a child support modification of $150 per month.
  • The payroll tax holiday, which began in January 2011 and provided workers with a 2% tax break on the first $110,100 of earned income, was not renewed. This means that a taxpayers earning $50,000 per year, who were previously saving an average of $83 per month as a result of the payroll tax holiday, will experience a 2% tax hike on their earned income from the previous year. For parents who entered or modified a child support order in 2011 or 2012, the tax holiday may have affected net income enough that a modification may be in order now that the tax holiday has expired. Is it worth fighting in court? Every situation is different. If you’re interested in learning whether your child support order may be affected by the expiration of the payroll tax holiday, contact an experienced and knowledgeable Pennsylvania Child Support attorney today.

When it comes down to it, although the media was bombarding every living soul with news of the impending fiscal cliff disaster and the legislation that was subsequently borne of the controversy, the tax increase is more likely to affect child support obligation for the high-net worth individuals more than the average tax payer. Nevertheless, staying on top of potential tax consequences is an important aspect of managing your child support matter. If you have a question about how the new tax law might affect you, don’t hesitate to call our office to speak with an experienced attorney who can give you a comprehensive overview of your child support matter.