Debunking the parable that the share used within the so-called “thumb upkeep rule” ought to lower because the payer’s earnings will increase | Fox Rothschild LLP

It has been said time and again that there are no formulas to determine maintenance. As I’ve blogged in the past, aside from one violation of law referring to the formula or “rule of thumb”, virtually every time the Appeals Division receives a case that a formula has been used, the case is reversed as the usage of formulas is not allowed. Rather, the courts are obliged to analyze the following legal factors:

(1) the actual needs and solvency of the parties;

(2) the duration of the marriage or civil union;

(3) age, physical and emotional health of the parties;

(4) the standard of living established in the marriage or civil union and the likelihood that each party will be able to maintain a reasonably comparable standard of living, with neither party having a higher standard of living than the other;

(5) employability, educational level, professional skills and employability of the parties;

(6) the length of time the party seeking maintenance has been absent from the labor market;

(7) Parental responsibility for the children;

(8) the time and expense required to obtain adequate education or training to enable the maintenance seeker to find adequate employment, the availability of training and employment, and the opportunity for future capital and income acquisitions;

(9) the history of each party’s financial or non-financial contributions to marriage or civil union, including contributions to the care and upbringing of children and to disruptions in personal careers or educational opportunities;

(10) the fair distribution of the ordered property and any payments for the fair distribution directly or indirectly from current income, provided this consideration is appropriate, fair and fair;

(11) the income available to a party from the investment of that party’s assets;

(12) the tax treatment and consequences of alimony for both parties, including designating all or part of the payment as a non-taxable payment;

(13) Type, amount and duration of any pending lite support paid; and

(14) Other factors considered relevant by the court.

However, the rule of thumb, or as I have called it the “dirty little secret”, still exists in practice. Before the 2019 tax / deductibility change in alimony, which was part of the Tax Reduction and Employment Act, the rule of thumb was commonly viewed as one third of the difference between the payer’s income and the recipient’s income (or imputed income), although a lower percentage was reportedly used in South Jersey for reasons unknown. That is, if, for example, the payer earned $ 350,000 and the recipient earned $ 50,000, the “rule of thumb” maintenance would be $ 100,000 per year.

Ask how a rule of thumb corresponds to factor four: “The standard of living established in marriage or civil union and the likelihood that each party can maintain a reasonably comparable standard of living. neither party has a higher claim to this standard of living than the other.“Necessarily, the payer has the opportunity to have a better lifestyle than the recipient as he has more net after-tax taxes, regardless of whether the maintenance is taxable or not. If the parties do not have children or the children are adults, the rule of thumb results look stricter when contrasted with this factor. When child benefit is paid to the recipient, it is not uncommon for the parties’ net cash flows after tax to be similar. It ignores for a moment that this cash flow on the payer side is supposed to support a person while he is active. On the recipient side, the cash flow would consist of supporting the recipient and the children.

Aside from the tax issue raised here (and people said 1/3 for the husband, 1/3 for the wife, and 1/3 for the government – though the numbers never worked that way) what’s the justification for giving the income earners more as the receiver in the face of Crews versus Crews (the landmark Supreme Court case dealing with the marital lifestyle) and factor 4? For more than two decades, I’ve heard things like “You have to give the man a reason to get out of bed in the morning” or “He’s the one who makes the money” as reasons from judges and mediators. In addition, after the Lombardi case in 2016, when combined with crews and factor 4, in high income / high wealth cases after the Lombardi case combined with crews and factor 4, the recipient should not play a major role in a maintenance supplement that gets the parties going? Despite this statement in the statute, there is currently no case that stands for the proposal for income equalization – although I have heard the argument since factor 4 was changed in 2014.

But back to these tricky rules of thumb. Since January 1, 2019, when the changes in the tax code affected the alimony and it was no longer deductible for the payer or included in the recipient’s income, practitioners have been demanding the new “rule of thumb”. I’ve heard 22%, 25%, 27%, anywhere between 22% and 27%, and even only 20% of the difference between income (or imputed income). Then I started hearing that the higher the income, the lower the percentage because of the higher tax rates. At first, that seemed plausible, but when you put it to the test – especially when compared to factor 4 – this myth can be debunked.

Let’s start with the same income from above – $ 350,000 for the payer and $ 50,000 for the recipient: at 25%, the rule of thumb is $ 75,000 per year; At 22%, it’s $ 66,000. At 25% the net split after taxes is 55% -45%; with 22% it is 58% -42%. In this case, at 22%, the payer has an after-tax net cash flow of $ 148,644 per year and the recipient has $ 106,668 or $ 41,976 less ($ 3,498 per month). At 25%, the difference is only about $ 24,000 ($ 2,000 per month).

If we use $ 500,000 for the payer and $ 50,000 for the recipient: Using 25%, the rule of thumb is $ 112,500 per year; For 22%, it’s $ 99,000. At 25%, the net split after taxes is still 55% -45%; with 22% it is 59% -41%. In this case, the payer has 22% net after-tax cash flow of $ 199,056 per year and the recipient has $ 139,668 or $ 59,388 less ($ 4,949 per month). At 25%, the difference is only approximately $ 32,388 ($ 2,699 per month).

If we use $ 750,000 for the payer and $ 50,000 for the recipient, at 25% the rule of thumb is $ 175,000 per year. At 22%, it’s $ 154,000. At 25%, the net split after taxes is still 54% -46%; At 22%, the spread widened to 58% -42%. In this case, at 22%, the payer has an after-tax net cash flow of $ 273,072 per year and the recipient has $ 194,664 or $ 78,408 less ($ 6,534 per month). At 25%, the difference is only about $ 36,408 ($ 3,034 per month).

If we use $ 1,000,000 for the payer and $ 50,000 for the recipient: Using 25%, the rule of thumb is $ 237,500 per year; At 22%, it’s $ 209,000. At 25% the net split after taxes moves to 53% -47%; with 22% it is 58% -42%. In this case, at 22%, the debtor has an after-tax net cash flow of $ 345,744 per year and the recipient has $ 249,672 or $ 96,072 less ($ 8,006 per month). At 25%, the difference is only approximately $ 39,072 ($ 3,256 per month).

If we use $ 1,250,000 for the payer and $ 50,000 for the recipient: Using 25%, the rule of thumb is $ 300,000 per year maintenance; At 22%, it’s $ 264,000. At 25%, the net split after taxes remains at 53% -47%; at 22% it remains at 58% -42%. In this case, however, the payer has 22% net after-tax cash flow of $ 418,416 per year and the recipient has $ 304,668 or $ 113,748 less ($ 9,479 per month). At 25%, the difference is only about $ 41,748 ($ 3,479 per month).

If we use $ 1,500,000 for the payer and $ 50,000 for the recipient: Using 25%, the rule of thumb is $ 362,500 per year; At 22%, it’s $ 319,000. At 25%, the net split after taxes remains at 53% -47%; at 22% it remains at 58% -42%. In this case, at 22%, the debtor has an after-tax net cash flow of $ 481,088 per year and the recipient has $ 359,664 or $ 121,424 less ($ 10,119 per month). At 25%, the difference is only $ 44,424 ($ 3,702 per month).

If we use $ 2,000,000 for the payer and $ 50,000 for the recipient: At 25%, the rule of thumb is $ 487,500 per year; At 22%, it’s $ 429,000. At 25%, the net split after taxes is 52% to 48%; at 22% it remains at 58% -42%. In this case, at 22%, the payer has an after-tax net cash flow of $ 636,672 per year and the recipient has $ 469,668 or $ 167,000 less ($ 13,917 per month). At 25%, the difference is only $ 49,764 ($ 4,147 per month).

So it seems clear that the rationale that the higher the income, the lower the percentage for the rule of thumb is not really true. One reason for this is that the marginal tax rate for income between $ 207,151 and $ 518,400 is $ 35. After $ 518,400, it rises to 37%. That said, virtually all of the above scenarios, basically anything that’s $ 518,400 and up, falls into the highest tax bracket. I think most people suggesting a variable rule of thumb would not apply the lower rate to $ 500,000, $ 600,000, $ 700,000 – maybe even if the income is more than $ 1,000,000. (And yes, I understand there can be a difference when it comes to effective rates, but ask if it is enough to justify using a lower percentage for the “rule of thumb”.)

It is also misleading to look at the percentage differences as income increases. While using a rule of thumb of 22% resulted in a consistently consistent 58% -42% (I didn’t know this until doing the calculations for this blog and was frankly surprised and it almost blew my theory) the percentages are misleading. You actually need to look at net after tax to gauge fairness or injustice – especially when factor 4 is really a consideration. Again, the courts and practitioners should analyze the maintenance factors. Nonetheless, if people use these “rules of thumb” as a guide, care should be taken to show where the net after-tax cash flows for each party to determine if the outcome of the formula is fair and in any way similar to the formula Goals and requirements of the Maintenance Act.

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