The biggest overhaul of the U.S. tax system in more than 30 years was signed into law on December 22, 2017. The Federal Tax Cuts and Jobs Act (TCJA) went into effect on January 1, 2018 and made sweeping changes to personal income taxes as well as corporate taxes.
The impact on California’s child support program was significant, because unlike many other states’ child support guidelines, California’s child support guidelines are based on net income that is available to parents after federal and state income tax liabilities. More specifically, California Family Code section 4059(a) requires that state and federal income taxes in a child support calculation are those actually payable (not necessarily the amount of the withholding from the taxpayer’s paycheck or other income) after considering appropriate filing status, all available exclusions, deductions, and credits.
State DCSS Child Support Services Division and Legal team began tracking proposed federal tax bills earlier in 2017 and submitted a comprehensive Request for Change to the guideline calculator approximately three weeks after the TCJA was signed into law. The changes were completed in two phases with a dedicated team of developers from the DCSS Technology Services Division and assistance from the DCSS Cross Functional Team. The first phase addressing all changes to federal taxes was validated by an independent certified public accountant (CPA) and released to users on April 22, 2018. A release training as well as an advanced guideline calculator training were provided to the local child support agencies (LCSAs) the following week covering all changes under the TCJA. Any remaining validation errors resulting in less than 1% discrepancy in federal tax calculations and changes to state tax calculations were completed and the final results were certified by the CPA on May 14, 2018, with no exceptions or discrepancies. The Judicial Council of California completed its review and testing on June 21, 2018 and re-certified the DCSS guideline calculator on June 21, 2018.
DCSS Office of Legal Services continues to provide training and discussion forums to the LCSAs regarding the TCJA and resulting changes to child support calculations. The most recent discussion forum was held at the Statewide Attorney Forum in Orange County, CA, in July 2018 and a more comprehensive training will be provided at the Child Support Directors Association Legal College on October 1, 2018. DCSS Child Support Services Division and Office of Legal Services are always available and happy to answer questions from the LCSAs regarding the guideline calculator and the impacts of the tax changes on child support calculations. Following is a high-level overview of the TCJA changes to personal income taxes and the resulting changes to the guideline calculator:
- Federal personal exemptions have been suspended: For tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, the deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero (IRC Sec. 151(d), as modified by Tax Cuts and Jobs Act Sec. 11041(a)). As indicated by the language of the TCJA, this is a temporary suspension until 2026 which reduces the amount of personal exemptions to $0. Accordingly, the personal exemption field in the guideline calculator has been maintained, but the correlating deduction amount has been set to $0 in the background for each exemption entered.
- Federal standard deduction amounts increased for all filing statuses:
- $12,000 for single or married filing separately
- $18,000 for head of household
- $24,000 for married filing jointly
- All federal personal income tax brackets and rates have changed.
- Child tax credit increased to $2,000 per qualifying child. The amount of the credit that is refundable increased to $1,400 per qualifying child. The adjusted gross income thresholds for child tax credit phase out have increased to $400,000 for married filing jointly, and $200,000 for all other filing statuses. These changes will result in the child tax credit amounts being higher and available to more families.
- New $500 non-refundable credit for qualifying dependents other than qualifying children (Family Tax Credit) has been introduced.
- The State and Local Taxes (SALT) deduction has been capped at $10,000 for married filing jointly, $5,000 for all other filing statuses.
- Federal itemized deduction phase-out has been suspended.
- Alternative Minimum Tax (AMT) exemption phase-out amounts, exemption amounts, and AMT excess taxable income thresholds have increased (resulting in fewer AMT cases).
- New Internal Revenue Code section 199A allows individuals to deduct up to 20% of qualified business income (Qualified Business Income Deduction) from self-employment and pass-through entities such as S corporations and limited liability companies.
The qualified business income deduction and the family tax credit entries in the guideline calculator currently require workarounds as shown in the Advanced Guideline Calculator training available on Child Support Central/CSU. A dedicated field for the qualified business income deduction is scheduled to be released in October 2018 eliminating the need for the workaround. A family tax credit field is scheduled to be released in November 2018.