Changes in 2019 for PA Spousal Support Guidelines and APL – Who’s Affected?

Now is the time to contact a family lawyer to find out if the new spousal support changes and APL guidelines help or hurt, in terms of one’s personal cash flow.

On December 28, 2018, new Pennsylvania spousal support changes and APL guidelines were issued that took effect on January 1, 2019. Litigants and lawyers both need to understand the new Pennsylvania Guidelines. If it is time for an award of support, everyone who gets or pays spousal support (or alimony pendente lite, “APL”) will be affected by the change to the support rules.

Since 1980, a dependent spouse can get support from the income superior spouse during the pendency of the divorce called alimony pendente lite (APL). There are some limits as to the length of time and in a few cases, the dependent spouse will not qualify. In most cases, however, when a married couple is separated, spousal support applies; if a divorce is pending, APL applies regardless of the claim that the recipient is at fault.

The biggest change in spousal support/APL: new formula and approach

The biggest change in calculation of spousal support/APL was triggered by the change in the tax laws. Effective January 1, 2019 new orders for spousal support, APL and alimony no longer have special tax treatment. Before that date, an order or signed agreement would lead to the inclusion of the amount in the taxable income of the recipient and a tax deduction for the payor.

That meant that if someone paid $1,000 a month in spousal support, APL or alimony, the payor got a $12,000 tax write-off and would save federal taxes on $12,000 of income. In comparison, the recipient would have another $12,000 of taxable income so the receipt of the money came with a price tag.

The purpose of the rules is to offset the change in the tax impact. No longer will a new spousal support, APL or alimony agreement or order trigger the tax impact.

If the couple was still married, they may have continued to file joint tax returns. Neither took the tax write-off, or paid taxes on the amount received. Often the benefit of filing jointly exceeded the special tax treatment, therefore husband and wife never felt the “benefit” or the “bite” of the shift in the tax effect.

The change in support rules means the amount of the payment is going to drop to adjust for the absence of the tax benefit or bite. If a person was paying spousal support, APL, or alimony and enjoyed that extra deduction, that payor will continue to keep the tax benefit under the old tax laws because it is based on a pre-2019 order or agreement. The payor might not want to modify the order in 2019. A new order will not continue the tax deduction benefit. In some cases where the payment was significant and the tax benefit was significant, the payor will be disappointed by the new guidelines. The discounted obligation may not be comparable to that payor’s after tax benefit.

The 2nd critical difference under the new rules: reallocating the “extras”

There is a second critical difference in the approach to spousal support under the new Rules. The new Guidelines provide for the initial calculation of spousal/APL and then the support court will shift that amount of money from the payor to the recipient, and the payor will have lower net income for the purpose of contribution to expenses in addition to the monthly Guideline amount. And the recipient is deemed to have higher net income. This will now change the percentage contribution to extra expenses. The extras include medical insurance premiums and uncovered medical. When there are children, the adjusted percentages apply to child care, educational needs and some extra curricular expenses.

For example, in the past, if the payor made four times as much money as the payee, assuming $4,000 per month net of taxes, while the recipient earned $1,000 net a month, the payor was obligated to pay 80% of medical insurance premiums and 80% of medical expenses (which are in excess of $250 per year). For children the payor also owed 80% of child care, necessary educational expenses, and some extraordinary expenses that were found to be appropriate for the family. That percentage contribution has now changed for every new case under the January 1, 2019 amendments to the support rules.

Using the hypothetical, if the income superior spouse nets $4,000 per month, and the lower income spouse nets $1,000 a month, with the new formula the dependent spouse will get $700 per month in spousal support. The dependent spouse will then be assigned income of $1,700 a month, and the income spouse will have income of $3,300 per month. The income superior spouse will no longer owe 80% of medical insurance and the extras, but only 66%.

With the shift in relative income, the support guidelines for a family with combined income of $5,000 will pay combined $1,415 per month for two children. For this hypothetical, assume the family medical insurance is employer provided and assume payor has partial custody, under 40% of the time. Under the old approach the higher income spouse would pay 80% of the Guideline child support amount; that parent would owe $1,132 to the dependent spouse. In 2019, due to the shift of income as a result of spousal support/APL, the income spouse only owes 66% or $934 a month. The total (spousal and child) under new rules is $1,634. Under old rules the total was about $1,664. A decline of $30 appears a modest difference.

Parents will feel the bigger impact of the shift in percentage contribution to extras like medical insurance, educational needs and child care. If educational and child care total $2,000 per month the split is now $1,320 by payor; $680 by lower income parent. Compare that with $1,600 or $400. The contribution to medical and extras will shift significantly.

For spousal support without children, the payor owes $920 under the new Guidelines, compared with $1,200 under the old rules. If the payor owed taxes based on a 25% tax bracket the drop is not so significant, however, the dependent spouse now owes 38.4% of medical insurance and uncovered medical (after the first $250 per year). The payors who were at a higher tax bracket lose out with non-deductible payments, but get help on the medical contribution.

In summary, if you only pay or get child support, the changes in the rules are relatively modest. In contrast, the shift in the approach to payment of spousal support or APL changes the amounts for all. Everyone has the right to ask the support orders be updated under the amended rules.

The change in support rules means the amount of the payment is going to drop to adjust for the absence of the tax benefit or bite. If a person was paying spousal support, APL, or alimony and enjoyed that extra deduction, that payor will continue to keep the tax benefit under the old tax laws because it is based on a pre-2019 order or agreement. The payor will not want to modify the order using the 2019 rules. In cases of significant payment of spousal support/APL beneficial to the payor after-tax in 2018, the payor will be disappointed when replaced by alimony in 2019. It is expected post-2018 alimony will not qualify as a modification of pre-2019 spousal support/APL.

If you are in need of assistance regarding 2019 Spousal Support changes or new APL guidelines in Pennsylvania or surrounding areas, please contact Mary Cushing Doherty at 1.833.LAW.1914.

Updated March 5, 2019

Stolen Employee Data: Pennsylvania Supreme Court Decision Breaks New Ground

In late 2018, the Pennsylvania Supreme Court decided that employees may sue employers for the release of stolen confidential employee data. The Court’s decision in the Dittman vs. University of Pittsburgh Medical Center, allowed University of Pittsburgh Medical Center (“UPMC”) employees to bring a class action for negligence after a data breach from UPMC’s computer systems.

The Decision’s Impact

The Court’s decision will have a far-reaching impact. First, the decision will require employers to use reasonable care to protect employees’ personal and financial information. Second, the decision allows negligence lawsuits even where the plaintiffs’ losses were purely economic and no physical injury or tangible property damage occurred. As such, the decision limits the “economic loss doctrine” that courts had used to dismiss such lawsuits.

The Back Story

The cyber attack took place in 2014. The data breach led to the theft of 62,000 employees’ names, addresses, birth dates, social security numbers, salaries, or tax and bank information. The hackers taking the information then used the stolen data to file fraudulent tax returns and steal employees’ tax refunds.

The Lawsuit

Right after the breach, a group of employees sued UPMC for negligence and breach of implied contract. The employees contended that UPMC had a duty to use reasonable care to protect employees’ personal and financial information from being compromised, lost, stolen, misused, and /or disclosed to unauthorized parties. The employees claimed that UPMC had breached this duty. Specifically, UPMC had (1) failed to undertake adequate security measures, (2) failed to monitor network security, (3) allowed unauthorized access to information, and (4) failed to recognize that information had been compromised. The employees alleged that UPMC failed to meet current standards for encryption, firewalls, and authentication.

UPMC filed preliminary objections seeking immediate dismissal of the complaint. UPMC argued that no duty of care existed to protect against data breaches, and that the economic loss doctrine barred negligence claims.

The Lower Courts Dismiss the Case

The Allegheny County Court of Common Pleas agreed with UPMC and dismissed the employees’ suit. The Court both relied on the economic loss doctrine and held that courts should not create a new affirmative duty of care to protect against data breaches. The Court had concerns that this new duty of care would flood the court system with lawsuits. The Court also said that data breach liability was a policy issue to be addressed by the legislative branch.

The employees appealed to the Superior Court, where a three judge panel upheld the lower court in a 2-1 decision. One dissenting judge stated that employers have a duty of care to protect against data breaches.

The PA Supreme Court Allows Employees to Sue for Data Breach

After accepting the case for appeal, the Pennsylvania Supreme Court overturned the two lower court decisions on both the duty of care and the economic loss issues. The Supreme Court held that UPMC had the duty to protect employee information since UPMC had taken the affirmative step to require employees to provide certain information. The Court said that this duty existed despite the intervening third party theft, because theft was foreseeable without proper data protection.

On the economic loss issue, the Court allowed a negligence claim for economic loss where a duty existed outside the parties’ contractual relationship. The Court found that the employees alleged that UPMC had a duty, outside any contract, to act with reasonable care in collecting and storing personal and financial information on computer systems. The Court’s decision is a setback for efforts to invoke the economic loss doctrine in defending against business-related tort claims.

Practical Implications: Employers Need to Use Reasonable Care to Protect Employee Data

What are the practical implications of the UPMC ruling? Employers will have to take additional steps to lock down confidential employee information. The decision will affect every employer, since all employers collect confidential data in the course of setting up basic transactions like direct deposit and tax and social security withholding. Legislative action may also provide more specific guidance on data protection. The decision will have a continuing effect in the workplace and in development of new data protection policies.

Is Crowdfunding Taxed?

An elderly man beaten with a brick on July 4th in Los Angeles is in critical condition. A German Shepherd is beaten and shot while protecting his young owner during a burglary. Then, there is the little girl born prematurely who needs tests, treatments, doctors and surgeries to survive. In each of these situations, the individuals received financial assistance by using the donation-based crowdfunding platform GoFundMe.


Crowdfunding isn’t a new concept

In their paper, a Brief History of Crowdfunding, David M. Freedman and Matthew R. Nutting define crowdfunding as “a method of collecting many small contributions, by means of an online platform, to finance or capitalize a popular enterprise.” The internet has allowed crowdfunding to reach an unlimited number of potential donations, but crowdfunding is not new. One famous example of pre-internet crowdfunding was the fundraising campaign for the Statue of Liberty’s pedestal.

When the Statute of Liberty sailed from France in 1885, there was no pedestal for her. She remained in crates on Bedloe’s Island for over a year until Joseph Pulitzer, owner of “The World” opened up his newspaper’s editorial pages to support the effort. Similar to a GoFundMe page, Pulitzer proposed to print the name of every individual who donated to the construction of the pedestal on the front page of The World, no matter how small the amount. His idea worked. By the fall of 1885 over 120,000 people had donated over $100,000, enough funds to complete the project.


Income Tax Implications

It’s unlikely that an individual who sets up a crowdfunding page considers the income tax implications of their fundraising efforts. In fact, Section 61 of the IRS Code states that “gross income means all income from whatever source derived,” unless a specific statutory exception exists. So, based on Section 61, the general rule is revenue raised from crowdfunding is includible in income unless specifically excluded elsewhere. However, a statutory exception does exist that may exclude crowdfunding revenue from an individual’s gross income. That exception arises under IRC 102(a), which is commonly known as the gift and bequest exclusion.

If a GoFundMe page is established correctly, the amounts raised may qualify for the gift and bequest exclusion under IRC 102(a). But when does a donation qualify as a gift rather than income under IRS Code Section & Regulations? The U.S. Supreme Court has defined a gift as given from ” ‘detached and disinterested generosity,’ … ‘out of affection, respect, admiration, charity, or like impulses,’ ” and not from ” ‘any moral or legal duty,’ or from ‘the incentive of anticipated benefit,'” or “in return for services rendered” (Duberstein, 363 U.S. 278, 285 (1960)). So, generous donors who make payments to GoFundMe pages should be giving based on a “detached and disinterested generosity” and should not receive any services or goods or “quid pro quo” for their donation.


Keep a paper trail

Remember the burden is upon the GoFundMe campaigner to prove the funds received qualify for the gift and bequest exclusion under IRC 102(a). Therefore, it is important to keep a paper trail and document everything in case the IRS comes knocking upon your door.

Essential steps in the paper trail include the following:

  1. Keep a list of the donors to the GoFundMe campaign; include their name, date of donation, and amount donated, and any contact information provided by GoFundMe.
  2. Clearly identify the recipient of the funds on the GoFundMe page.
  3. If the campaign is set up by someone other than the beneficiary, be sure to clearly indicate on the GOFUNDME page that the creator is acting on behalf of the beneficiary.
  4. Be sure the campaign website clearly states that donations or gifts are solicited. If possible and appropriate, the website should also state that donors will receive nothing in return for their donations.
  5. Print and keep a copy of the campaign website to show to the IRS. By the time the IRS issues a notice of deficiency, the campaign website may no longer be available and the taxpayer (whether an agent or a beneficiary) has no way of showing the IRS the information used to solicit donations.
  6. Keep documentation of all monetary transfers of the funds to the beneficiary or spent on behalf of the beneficiary. A clear paper trail or accounting should exist showing that the funds were spent as indicated on the website. Receipts, invoices and copies of checks should be maintained as well.

In the examples used above (the premature birth, the elderly man, and the German Shepherd), the funds raised are for necessities (i.e., medical treatment and care), and the donors did not receive any services or goods in return. Once donation based crowdfunding moves to patronage-oriented endeavors such as creative or artistic endeavors, where a backer receives something in exchange for their payment, or equity-based crowdfunding, where backers received equity for their payment, the funds donated no longer qualify for the IRC 102(a) gift and bequest exclusion. Instead, the crowdfunding campaign has clearly moved into the realm of generating revenue that is reportable income to the IRS.

If you have any questions about the legalities of crowdfunding, please contact us at main@highswartz.com or call (215) 345-8888. Or contact any of our estate attorneys in Bucks or Montgomery Counties. Our Wills, Trusts & Estates attorneys provide comprehensive legal services to assist in all of these matters.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.