Implications of the CARES Act for Financial Issues in Family Law

April 20, 2020Alerts

The Coronavirus Aid, Relief, and Economic Security (CARES) Act — signed into law on March 27, 2020 with the intention of providing emergency assistance for individuals, families and businesses impacted by the coronavirus COVID-19 pandemic — has multiple family law implications.

Stimulus Payments and Child Tax Exemption

The CARES Act will provide many individuals with a “recovery rebate,” known as a “stimulus payment” or “stimulus check,” in the next few weeks based upon their adjusted gross income. The stimulus payments are considered an advance or prepayment of a 2020 tax credit. The amount an individual may be entitled to will be based on an individual’s adjusted gross income from their 2019 tax return, or if a 2019 return has not yet been filed, their 2018 return. A general overview of the stimulus payment amounts is as follows:

  • Individuals (filing Single) with adjusted gross income of $75,000 or less = $1,200
  • Individuals (filing Head of Household) with adjusted gross income between $112,500 - $136,500 = Between $0 and $1,200
  • Individuals (Married Filing Jointly) with adjusted gross income between $150,000 and $198,000 = Between $0 and $2,400

Depending on an individual’s adjusted gross income, the payments above are also increased by $500 for each qualifying child, regardless of the number of children an individual may have.

On a preliminary note, to the extent that divorcing parties are not yet separated at the time the stimulus payments are earned and/or received, the payments would presumptively be community property in community property states such as California. As a result, the stimulus payments would likely be equally divided between parties in community property states if they are received before the parties’ separation.

Further, based on the terms of the CARES Act, the stimulus payments, including the $500 payment for each qualifying child, will be electronically deposited to an account provided by the taxpayer in connection with their 2018 or 2019 tax returns. For divorcing or divorced parents, it is likely that the parent who claimed the child or children on their 2019 tax returns will obtain the benefit of the $500 payment(s). Alternatively, for parents who have not yet filed a tax return for 2019, the payment for the child(ren) will be based upon the parent who claimed the child(ren) on their 2018 income tax return. This may not seem to be a fair or equitable result for parents who have joint custody and who have elected to alternate the child tax exemption. It may appear that one parent is receiving a “windfall” just because they have claimed or will claim the child(ren) in 2018 or 2019. If 2019 tax returns have not yet been filed, it is likely that for parents who alternate the child tax exemption, the parent who gets the exemption in 2019 will rush to file their 2019 tax return as soon as possible in order to get the benefit of these payments.

While one parent’s receipt of the $500 payments over the other parent is sure to create conflict between parties, it is reasonable to remind clients that the stimulus payments are considered an advance of a 2020 tax credit and, as such, a parent who is entitled to claim the child or children on his or her 2020 tax return should receive the benefit of the payments for qualifying child(ren).

In a situation in which two parents who filed jointly for 2018 and were divorced by 2019 and neither has filed their 2019 returns, if the IRS does not have the parties’ account information or if the account on file from 2018 is no longer open, a refund check in the name of both parties will be sent to the address on their most recent tax return. This address is usually where only one of the parties currently resides. Prior to mailing the joint check, the IRS has specified that it will also be mailing a notice to the address on file regarding when and how the payment will be made.

There will likely be disagreements when stimulus checks in the names of both parties are sent to only one parent and we should be prepared to address this in our Judgments of Dissolution of the Marriage (and for legal separation). The CARES Act specifically states that where a payment is made in connection with a joint return, half of the credit shall be treated as having been made to each individual filing the return. Accordingly, it appears that the payment should be split or shared in some proportion between the parties and we should be prepared to deal with this issue between the parties.

The manner in which the CARES Act allows for the application of these child tax credits may lead to disagreements that require court intervention. Unfortunately, courts in California and beyond have made it clear that they are only open at this time to address domestic violence restraining orders, and emergencies or exigent circumstances. Because the allocation of these payments will likely not be viewed as an urgent issue, courts are unlikely to hear such issues quickly. How courts will handle these types of issues is also debatable. In light of the relatively small amount at issue, it would be prudent to advise clients to make attempts to divide the payments relating to children in a reasonable manner. For instance, if a parent has lost his or her job or has experienced a reduction in pay as a result of the pandemic, it would be practical for that parent to receive all or a portion of the payment.

Stimulus Payments and Child Support Arrears

Because the stimulus payments are considered to be an advance or a prepayment of taxes individuals would owe for 2020, if a child support payor is behind on their child support payments, it is likely that the payor’s stimulus payment will likely be offset and reduced by the amount owed in child support. However, this will only occur in cases where the states have reported the past due child support payments to the U.S. Treasury, a requirement in most states. As such, to the extent that child support arrears are owed to the other parent, at least a portion, if not all, of the stimulus payment may be used to pay down the arrears owed. Other unpaid debts such as back taxes, student loan payments, other garnishment, etc. will not be applied to the CARES Act payments.

Unemployment Benefits and Child/Spousal Support

The CARES Act established the Federal Pandemic Unemployment Compensation (FPUC) program to increase unemployment benefits for millions of Americans who are out of work as a result of the coronavirus pandemic. Under FPUC, eligible parties who collect certain unemployment insurance benefits, including regular unemployment compensation, will get an extra $600 in federal benefits each week through July 31, 2020. The $600 per week in extra unemployment compensation is in addition to an individual state’s unemployment benefit. In addition, the Act extends the maximum period of unemployment benefit coverage under state law for an additional 13 weeks. Importantly, this federal benefit is available to workers who are typically excluded from coverage, including those who are self-employed, independent contractors and those with limited recent work history. The payments will date back to an applicant’s eligibility date or the date the applicant’s state signed an agreement to provide the benefits, whichever is later. All states have executed agreements with the Department of Labor as of March 28, 2020. As states start to provide the extra payments, eligible people will receive retroactive payments to one of the above dates.

The extra $600 per week in federal unemployment benefits may impact current child and spousal support orders. Under California family law and the law of most states, unemployment compensation is considered income available for support and is included in a party’s income for purposes of calculating child or spousal support. As a result, a party’s receipt of an additional $2,400 per month in unemployment compensation could affect the parties’ current child and spousal support orders and increase the number of requests for modification of support orders. For instance, the party not receiving the unemployment benefit may seek a modification of the parties’ support orders based on the unemployed party’s receipt of an additional $2,400 per month in income. However, in light of the fact that unemployment compensation is intended to be a benefit only provided for a short-term period and the CARES Act only extends unemployment benefit coverage for an additional 13 weeks, it is unlikely that courts will modify child and spousal support orders on these grounds. Moreover, many state courts are not addressing issues relating to modification of support for several months, by which time a party may no longer be receiving the increased unemployment benefit.

Withdrawal of Retirement Funds

Ordinarily, if an individual takes money out of a retirement plan before the age of 591/2, not only would the individual need to pay income taxes depending on the amount withdrawn, but they would also be subjected an additional 10% penalty as set forth in Internal Revenue Code Section 72(t). However, the CARES Act has created an exception to the penalty such that a taxpayer can now take a distribution of up to $100,000 in 2020 that will not have the ordinary penalties attached to it. The Act also provides for the option to avoid any income recognition by repaying the distribution to the retirement plan within three years of an individual’s receipt of the distribution. These distributions are limited to individuals who are diagnosed with COVID-19 or test positive for the SARS-CoV-2 virus, who have a spouse or dependent who is diagnosed with COVID-19 or tests positive for the virus, or who have experienced adverse financial consequences resulting from reduced work hours, layoffs, furloughs or lack of childcare. The caveat to these penalty-free distributions is that individuals who take advantage of this benefit will still have to pay income taxes on the withdrawn distribution. Additionally, under the Act, an individual can only borrow between $50,000 and $100,000 from a retirement plan between March 27, 2020 and September 23, 2020 (180 days after enactment of the Act), after which point the limit to borrow reverts to the standard $50,000.

These distributions could potentially be problematic for parties who have a pending divorce case. If a party to a divorce action seeks to take advantage of this provision and withdraw monies from a retirement account, in many states, the requesting party would need to first obtain the written consent of the other party or an order of the Court in order to initiate the withdrawal. For instance, in California, all parties to a divorce are bound by the Automatic Temporary Restraining Orders (ATROs), which restrict both parties from transferring, encumbering, hypothecating, concealing, or in any way disposing of, any property, real or personal, whether community, quasi-community, or separate, without the written consent of the other party or an order of the court, except in the usual course of business or for the necessities of life. It is questionable whether a party requesting such a distribution could argue that it is for the “necessities of life.” Additionally, since money withdrawn from a retirement account is considered income for purposes of child and spousal support, parties who are able to withdraw money from their retirement accounts could potentially suffer adverse consequences if they are the supporting spouse and the supported spouse seeks an upward modification of support based on the supported spouse’s increase in cash flow. This would potentially leave a similar impact on the issues of attorneys’ fees and professionals’ fees, as the distributions could create more liquidity and would be a source for payment of fees. Accordingly, it seems that these distributions should be considered as a last resort.

Aleen Mayelian is an attorney in Fox Rothschild's Family Law Practice.