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Wages

Entering wages seems simple enough, right? Most of the time it is. But you need to know a few things about wages.

Wages and Tax

Wages generates all three tax and support factors (income tax, employment tax, available for support).  If one or two of the three employment taxes do not apply, then you’ll account for that as described below.

Wages and Support

What’s left of wages after tax is available for support. If a portion of wages are unavailable for support by statute, we’ll take care of that on another line. The simple rule is this:

Enter all wages that are subject to at least one of the employment taxes.

Simpler still:

Enter Medicare wages.

You can find this amount on the pay stub as amount subject to Medicare, or amount subject to Social Security. You should double-check this by dividing the Medicare by 0.0145. For example:

      Medicare tax = $11.50

      Wages = 11.50/0.0145 = $793

If you’re wondering where this magic number 0.0145 comes from, it’s just the Medicare tax rate of 1.45% displayed in decimal form. Unlike FICA, where the ceiling is $97,500 in 2007 ($102,000 in 2008), there is no upper wage limit for Medicare. That’s why you can just look for the Medicare wages. The Medicare box and the calculated Medicare wage, here $793, should match up.

EXAMPLES

Example #1.  A state employee is a member of PERS and does not pay FICA. You will later exclude his FICA in the Settings Screen. But for now, if he pays still pays SDI or Medicare, then include his wages.

Example #2. Part of an employee’s compensation includes untaxed medical insurance. If there are no employment taxes and no income tax, you do not need to include that as wages. After all, if there are no taxes and it’s exempt from guideline income, it won’t make any difference. However, we’ll see next how to optionally enter it as wages and back it out in order to better document her case.

In Example #2, you can leave the completely untaxed health insurance benefit out of DissoMaster. On the other hand, you can also display it so everyone knows you have considered it. In that case, you can enter it as Other Taxable Income (which avoids employment tax for this example), enter it also as an adjustment to income (that is, an ATI, which backs out the income tax) and also enter it as a guideline deduction (which removes it as income available for support).

If you choose to leave it off entirely, be sure to document that in the Notes tab or elsewhere.

  Tax Tips

  While there are some exceptions, the following tax tips will help you use DissoMaster:

  1. If you pay spousal support, you get a tax break.
  2. If you receive spousal support, you pay tax on it.
  3. If the person paying spousal support has a higher tax rate than the person receiving it, there is an overall tax benefit. You can use DissoMaster to maximize this tax savings and share it.
  4. Child support has no tax effect by itself but it affects spousal support, which in turn affects tax.
  5. Support calculations are affected by exemptions, not withholding allowances. (A dependent exemption prevents some income from being taxed. A withholding allowance adjusts the paycheck.)
  6. Parties can freely transfer dependent exemptions between them. It’s usually but not always a good idea. 
  7. Transferring a dependent exemption also transfers the annual $1,000 Child Tax Credit. It has nothing to do with desirable Head of Household filing status eligibility.
  8. An alternate support arrangement, which may look nothing like guidelines, can save money for one or both parties. These are DissoMaster “tactics”.
  9. Alternative Minimum Tax (AMT) is very complicated, but the concept is simple: It is similar to a flat tax. DissoMaster does most of the work for you. Don’t think it is rare and exotic: in live training, I show how AMT can apply to someone with less than $3,000 per month in wages.
  10. Registered Domestic Partners (RDP) and Married parties are treated on the same playing field for California tax. The federal treatment is wildly different.

Party Info

Expand to enter general information on the parties. These affect tax and support, so click the plus sign to edit any information required.

Party Info

The blind and senior statu affect taxpayers who do not itemize. If a party claims the standard deduction, then support will change.

Number of Children

This topic will be added soon.

% Time with NCP

You can enter the party's average timeshare for all children up to, not including 50.00%. You're entering noncustodial time, which is why you can't enter more than half. There is no need or place to enter the custodial timeshare. For example, you would enter the 20% NCP timeshare but ignore the 80% CP timeshare. That's because DissoMaster calculates the 80% based on the 20% you enter.

Filing Status

Set the filing status for each party to the federal filing status.

Filing Status

Note that each married status (seperate and joint) has a left and right arrow option. These are more properly viewed as pointing "in" or "out" with respect to the other party. For Father, "MFJ>" and "MFS>" mean that he remains married to Mother, while "<MFJ" and "<MFS" mean he is married to a new spose.

Exemptions

There is sometimes confusion between exemptions and allowances. Exemptions tend to be limited in number and are only available for human beings (mother, father, kids and other dependents). Withholding allowances are used to adjust paychecks to amounts that better reflect a worker's tax situation. Unlike exemptions, there can be almost any number of withholding: I am aware of one employment situation with approximately 600,000 allowances. Obviously, claiming an allowance does not require an actual person (although it can).

DissoMaster provides a lot of smarts related to exemptions. It also exposes a lot of available options relating to exemptions. Despite this power and options, most of the time you can, and should, allow DissoMaster to automatically generate the appropriate number of exemptions.

Exemptions

DissoMaster provides an exemption for the party, for each child the party has custody of, for each hardship child, and for a new spouse under MFJ-out.

If you do need or choose to manually adjust exemptions, you can do so by expanding the exemption line. However, a much better place to do so is in the Child Manager.

Unless you make manual exemption changes, DissoMaster displays an asterisk next to the total exemptions as shown above. If you manually change exemptions the asterisk disappears and the bottom line changes "Auto-calculate total" to "No". To restore the automatic exemption feature, simply change this back to "Yes".

Self-Employment Income

Enter the business profits after expenses. (If you're reading the tax return, this is the amount that appears on Form 1040 that transfers from Schedule C.) DissoMaster generates income tax, self-employment tax and guideline income from your entry.

Self-employment taxes are approximately double that of employment tax. For the same amount of income, this leaves a wage earner with more discretionary income than a self-employed. But that for the same amount of income, a wage earner will also pay more support than a self-employed due to his or her extra after-tax income.

There are a number of other tax differences that distinguish self-employment income from other types of income; be sure to separate SE income from other types and enter it appropriately.

 

Other Taxable Income

There are quite a few categories of taxable income, ranging from short and long term capital gains to rental income. It's important that you expand this line and enter taxable income into the corresponding line. If none of the listed categories apply, the bottom-most entry is for "Other" taxable income.

The income you enter is subject to income tax or capital gains tax, but is not subject to employment tax. After tax, it is available for support.

 

 

TANF

Temporary Assistance to Needy Families is a welfare payment that has absolutely no effect on support. However, entering this figure is helpful to the court so it can understand the overall income of the parties in setting discretionary support.

Other Nontaxable Income

Enter income that is available for support but that incurs no employment, income, or other taxes. This could include actual nontaxable income or a job perk that is considered as guideline income.

Even though this is nontaxable income, you can actually use this line to enter purely tax benefits. For example, suppose a party enjoys a tax credit for purchasing a hybrid car. You can enter this as nontaxable income to increase the party's guideline income if you consider the credit material to the case. Or you could accomplish the very same thing by entering a negative amount as Other guideline deductions.

 

DissoMaster Overview

DissoMaster calculates California child and spousal support, which are the most complicated support calculations in the country and very likely the world. In a nutshell, when you are finally done with the messy task of calculating a person’s tax you are less than half-way to calculating support. After that, you have to calculate the other party’s tax and then apply California’s support formula, which in itself is far from simple.

All that and you may only be getting started! While the above will get you to guideline support, there are typically tax savings to be shared by both parties if you look for them. Happily, support calculators do the heavy lifiting. Your main job is to find the numbers and know where to put them.

Why is DissoMaster the leading support program?

DissoMaster was not the first program to calculate support, but its rise to prominence was largely due to its efficient workspace. That concept gained wide acceptance among the courts and other DissoMaster users.

Data entry mostly takes place in a single, crowded screen, shown below in two versions. The top layout displays more info (though more can be shown) while the bottom one shows less info (though less can be shown). You can easily customize it any way you like, including custom starting data and features. By “easily” I mean just that: just click the plus/minus signs to open/close lines and then choose File>Save As Default.

Main Screen - Full

Main Screen - Slim

Frankly, this summary screen is a little harder to learn than if it were spread out over more windows. But it has two very powerful advantages. First, once you’re comfortable with the layout – and tens of thousands of professionals have become so – you can work very quickly. Second, you can see data entry and results at a single glance. That’s very powerful, especially to see how a change in data produces a change in support.

How to Learn DissoMaster

I hope these online tutorials provide a good start. After that, there is a lot of information in DissoMaster’s Help system, including video help you can install from the program CD. Video help focuses on legal concepts rather than the mechanics.

Each year, Art Grater presents live seminars around the state, usually in April and May. It includes a couple of hours of DissoMaster training, plus an hour of Propertizer & Executioner (property and arrears), plus an hour of tax and support information, plus 2 hours of Advanced DissoMaster training – six hours in all. Details are at www.DissoMasterInfo.com. The 2008 schedule will be posted by early December.

Main Screen Introduction

When you look at the data screen displayed above, notice that there are 3 sections. Enter data into the area on the left. There is a column for each party. Click the "DP" button for a registered domestic partnership (RDP).

The narrow center section and the area on the right display results. Guideline results appear in the center section while supplemental information appears on the right side. If you don’t care about that additional (but helpful) information, you can collapse the right side as shown in the lower of the two printscreens above. There are additional screens for information and results, but they all support the main data screen.

I hope these tutorials help you get started. I’ve kept them relatively short so you can quickly get started on the right footing. However, as we go, I’ll still emphasize the ‘why’ so you get off to the right start.

New Spouse Income

The effect of new spouse income is very often a surprise on first encounter. For example, suppose Jim and Pam divorce and Jim marries a new spouse with considerable earnings. Pam, who is receiving support in this example, might well believe that this support will increase given Jim's improved financial situation.

Instead, Pam may well find that support decreases. Let's have a look why...

The income of a new spouse income does not directly contribute to a party's guideline income. However, new spouse income affects a party's joint return and thus indirectly affects guideline income. Because higher income is taxed at a higher rate than lower income, Jim's share of taxes increases due to his new spouse's income.

As a result, when Jim remarries and files a new joint return, his guideline income actually decreases if his new spouse has any income. It's important to note that there is no effect from new-spouse income if the filing status is anything except MFJ.

New spouse income

As you can see, some expense items appear when you expand the New-spouse income line. That's because certain expenses have different guideline effects depending on whether the party or the new spouse incurs them. For example, it is a tax ATI whether Jim or his new spouse pays it. But it is only a guideline deduction if Jim pays it.

There is one final point to make here: How to enter tax deductions and other similar expenses. For example, suppose Jim and his new spouse have mortage interest expenses. Do you enter the entire expense or half the expense?

To answer this, just be aware that you are constructing a joint return. Since Jim and his new spouse will deduct the entire mortgage interest on their joint return, you should enter the entire deductible mortgage interest expense.

Adjustments to Income

Certain tax benefits are sometimes referred to as "deductible". For example, paying spousal support is sometimes considered a deductible expense. Spousal support payments are, where qualified, actually adjustments to income (ATI).

An adjustment to income always reduces income tax, while a tax deduction doesn't always do so. When it does, it is often worth less than an ATI.

ATI

Enter most adjustments to income on this line. One notable exception is mandatory retirement contributions. DissoMaster provides a separate line for these so it can reduce guideline income by mandatory retirement contributions.

The ATI line is a tax benefit but not a reduction of income available for support. On the contrary, the tax benefit increases income available for support.

Some ATIs are treated differently for federal and state purposes, as listed on California tax form CA. Enter these in the expansion line, as shown above.

Child Support Paid

The FL-150 Income and Expense declaration lumps together CS and SS paid, but in DissoMaster you need to separate these because the tax treatment is very different. SS, but not CS, is a tax adjustment to income (ATI). Both are guideline deductions.

Support paid other marriage or relationship

 

 

Spousal Support Paid

The FL-150 Income and Expense declaration lumps together CS and SS paid, but in DissoMaster you need to separate these because the tax treatment is very different. SS, but not CS, is a tax adjustment to income (ATI). Both are guideline deductions.

Support paid other marriage or relationship

 

Health Insurance

By default (that is, when you enter it on the main line), health insurance is both a guideline deduction and an itemized tax deduction.

Health Insurance

If it's part of a pre-tax deduction, then see the discussion in "Wages".

The "Paid by party" line assures proper tax treatment for self-employeds. Where qualified, their health insurance is an ATI instead of an itemized deduction for wage earners. Distributing health insurance accordingly on the expansion lines let's DissoMaster properly calculate deductions vs ATIs. DissoMaster applies the appropriate tax rules for mixed wage and SE income.

Itemized Deductions

Expand the itemized deduction line to enter various tax deductions from IRS Schedule A.

Itemized deductions

Keep in mind that a deduction that is good for a party's tax situation can be bad for that party's support position. For example, a big mortgage interest deduction leaves a payor with a larger support obligation, or leaves a recipient with a reduced need for support. In both cases that's because the party's taxes go down for that big interest payment if the party itemizes.

Check back later for an expanded tutorial on each itemized deduction.

Union Dues

Required union dues affect support in two ways. First, they lower that party's income available for support. Second, they may affect tax. That second effect is iffy because union dues, along with other miscellaneous itemized reductions, are not fully considered as an itemized deduction. Only that portion exceeding 2% of the adjusted gross income is deductible. In addition, if a party does not itemize (taking the standard deduction instead), then none of the union dues are deductible. But they remain a guideline deduction.

Mandatory Retirement

The mandatory retirement contribution you enter here reduces income available for support. If you enter it on the main retirement line, DissoMaster assumes it is a tax benefit (that is, an ATI). If it's not, then expand the line and enter it under the unqualified line, where it will be unavailable for support but not a tax benefit.

Mandatory Retirement

If the retirement contribution is voluntary and available for support, then enter it as applicable on the ATI line above.

 

Hardships

There are two categories of hardship deductions. First, there are direct reductions of income available for support due to certain statutory expenses such as extraordinary medical expenses.

The more complicated hardship deductions is due to so-called hardship children. By default, this hardship deduction is calculated to match the Presumed CS (basic plus add-ons) on a per-kid basis. That is, the hardship per hardship kid is set equal to the Presumed CS per child of the support order. For example, if there are 2 kids in this order and 1 hardship kid then, for example, you could have a hardship deduction of $500 and total Presumed CS of $1,000. There are other hardship options available in the Setting Screen.

Hardships

For hardship kids, expand the Hardship Deduction line and then select the party's "Hardship factor". It's called a factor instead of a kid because you can have partial hardships where, for example, a parent only cares part-time for hardship kid. So you might enter a 1.0 because you have one full hardship child or two half-hardships (or even other combinations!).

The asterisk you see for each party on the main hardship line means that DissoMaster is calculating this for you. If you intentionally or accidentally override the asterisk by entering a figure on this line, the bottom line for "Use calculated hardship" will change from Yes to No. To reset the automatic calculation, simply change this back to Yes.

Use the Child Manager to control the exemption(s) for this hardship child(ren). For example, two-half hardships could involve either 0, 1 or 2 dependent exemptions. Accurate support depends on assigning the correct number of exemptions to each party, so be sure to use Child Manager unless you're sure that the automatic generation of exemptions is what you want. The automatic exemption assignment is one exemption for each full hardship.

Other Guideline Deductions

The amounts you enter as other discretionary deductions reduces income available for support dollar-for-dollar. In addition to actual discretionary deductions, you can use this line to adjust guideline nets due to program limitations.

For example, suppose a party is subject to a special excise tax. This sort of tax is beyond the scope of a guideline support program but if it is unavailable for support then enter it as an Other Discretionary Deduction.

 

 

 

AMT

DissoMaster considers the Alternative Minimum Tax, but you may need to enter some information to ensure an accurate calculation.

What is the AMT?

The AMT is a parallel tax system with fewer brackets and fewer deductions. Originally designed to tax the very wealthy, it has been affecting more and more taxpayers since its inception, appearing more frequently in your DissoMaster cases.

How do I know if it applies to my case?

Although the typical AMT case involves a six-figure income, it can occur with less than $3,000/month wages! The prime factors are as follows:

OK, one or both parties file IRS Form 6251. Now what?

Form 6251 has noticeably more entry lines than DissoMaster. There is a lot of information you’ve already entered or that DissoMaster calculates that can be used for Form 6251. For example, 6251 asks for state income tax. Since DissoMaster figures that anyway, there is no need to enter that.

Transfer the remaining information from Form 6251 to DissoMaster. Check the completed Form 6251 calculation against the DissoMaster AMT form.

You may need to determine SS-recipient information without the benefit of Form 6251 as they may be pushed into AMT due to receipt of spousal support.

The AMT has only two brackets: 26% and 28%, so it’s something of a flat tax. While 26% and 28% are lower than the maximum rates in the regular tax system and the AMT has a larger exemption, AMT applies to a wider range of income. That’s because certain expenses (e.g., state tax) reduce regular taxable income but do not reduce AMT taxable income.

Add-ons

Add-ons

By default, half of a party's payment for certain expenses such as child-care is added to the Basic CS. The total of basic CS plus (or minus) add-ons is called Presumed CS. Expand the Add-ons line to display the various categories of add-on expenses. When there are more than one child, expand the category and enter the add-on expenses attributed to each child.

If you don't distribute the expenses then a couple bad things happen. First, the allocation of add-ons by child will not be accurate. For example, if there are two kids but only the younger child requires child-care expenses of $1000, then entering the amount as a lump sum will be considered as $500 for each child. When the eldest child leaves the nest, $250 of add-on support (half of $500) will incorrectly phase out.

The second problem is that child-care expenses affect tax due to the child-care credit. Failing to distribute expenses may cause a miscalculation of this credit.

Other methods to calculate add-ons are available in the Settings Screen.

 

Click menu items to the left for a basic introduction to DissoMaster.