Opinion ID: 1349234
Heading Depth: 1
Heading Rank: 5

Heading: earned income credit

Text: The primary question that the mother's first assignment of error presents is whether the EIC under the Internal Revenue Code is a means-tested public assistance benefit for purposes of paragraph D of the Guidelines and therefore should be excluded from the calculation of income for child support purposes. Paragraph D of the Guidelines defines the total monthly income that each party shall list on the guideline worksheet, in relevant part, as follows: D. Total Monthly Income. This is income of both parties derived from all sources, except all means-tested public assistance benefits and payments received for children of prior marriages. All income should be annualized and divided by 12. The mother's income portion of child support guideline worksheet 1 was thus set forth: Mother Father 1. Total monthly income from all sources (except payments received for children of prior marriages and all means-tested public assistance benefits) 2,340.00 6,042.00 ________ _________ 2. Deductions a. Taxes Federal 202.88 1,184.77 ________ _________ State 45.26 306.13 ________ _________ b. FICA 179.01 462.21 ________ _________ c. Health insurance 236.00 -------- -------- d. Mandatory retirement -------- -------- e. Child support previously ordered for other children f. Total deductions 427.15 2,189.11 _______ ________ 3. Monthly net income 1,912.85 3,852.89 -------- -------- The father's income portion of child support guideline worksheet 1, on the other hand, stated: Mother Father 1. Total monthly income from all sources (except payments received for children of prior marriages and all means-tested public assistance benefits) 2,390.00 6,042.00 ________ ________ 2. Deductions a. Taxes Federal 1,33.3.70 -------- --------- State 319.30 -------- --------- b. FICA 182.83 462.21 ________ _________ c. Health insurance -------- 236.17 d. Mandatory retirement -------- --------- e. Child support previously ordered for other children -------- -------- f. Total deductions ________ ________ 3. Monthly net income 2,207.17 3,690.62 -------- -------- The mother asserts that the EIC is a means-tested public assistance benefit that should be excluded from the calculation of her income for purposes of child support under paragraph D of the Guidelines. Absent the EIC, the mother claims that she would have paid state and federal taxes in the amount deducted from her income as calculated on the mother's worksheet 1. Therefore, she argues that the amount of her tax liability, before the EIC is applied, should be deducted from her income because the amount of tax liability which is satisfied by the EIC is not to be excluded from her income if the credit is, in fact, a means-tested public assistance benefit. The father argues, as he did in the district court, that the mother should not be allowed to deduct state and federal income tax from her gross income on worksheet 1. The father claims that such a deduction would falsely represent the mother's federal and state tax liability as she is refunded the full amount she pays in such taxes, plus some credit in the form of cash from the IRS due to her low income level and qualification for the EIC on her federal income tax return. We must, therefore, first address whether the EIC is a means-tested public assistance benefit for purposes of paragraph D of the Guidelines. The Guidelines do not define the term means-tested public assistance benefit. However, there is a plethora of statutory and regulatory law that provides guidance to us in determining first the meaning of public assistance benefit and then the descriptive term means-tested. In federal law, the legislative history of the Welfare Reform Act of 1997 reveals that public benefit was originally defined as one that includes `cash, medical, housing, and food assistance and social services.'  Aleman v. Glickman, 217 F.3d 1191, 1194 n. 2 (9th Cir.2000) (quoting H.R.Rep. No. 104-725 (1996), reprinted in U.S.Code Cong. & Admin.News 1996, pp. 2183, 2649). Also, Congress has enacted legislation which restricts aliens' access to welfare and public benefits. In so doing, Congress has defined federal public benefit to mean the following: (A) any grant, contract, loan, professional license, or commercial license provided by an agency of the United States or by appropriated funds of the United States; and (B) any retirement, welfare, health, disability, public or assisted housing, postsecondary education, food assistance, unemployment benefit, or any other similar benefit for which payments or assistance are provided to an individual, household, or family eligibility unit by an agency of the United States or by appropriated funds of the United States. 8 U.S.C. § 1611(c)(1) (Supp. V 1999). One jurisdiction, the District of Columbia, defines public assistance as `payment in or by money, medical care, remedial care, goods or services to, or for the benefit of, needy persons.' Committee of Blind Vendors v. District of Columbia, 28 F.3d 130, 132 n. 2 (D.C.Cir.1994) (quoting D.C.Code Ann. § 3-201.1(6) (2000)). Another state, Kentucky, defines public assistance as money grants, assistance in kind, or services to or for the benefit of needy aged, needy blind, needy permanently and totally disabled persons, needy children, or persons with whom a needy child lives or a family containing a combination of these categories. Ky.Rev.Stat. Ann. § 205.010(3) (Lexis 1998). These sensible definitions guide us to our determination that for purposes of paragraph D of the Guidelines, a public assistance benefit is one that includes a payment in money, or by assistance in kind, to, or for the benefit of, a needy person. Similarly, in determining whether such a benefit is means-tested, we find the U.S. Department of Health and Human Services interpretation of the phrase federal means-tested public benefit to be instructive on this point: a program is considered `means-tested' if eligibility for the program's benefits, or the amount of such benefits, or both, are determined on the basis of income or resources of the eligibility unit seeking the benefit. Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA); Interpretation of Federal Means-Tested Public Benefit, 62 Fed.Reg. 45,256, 45,257 (August 26, 1997). Put more succinctly, [g]reater earnings yield less assistance. This is what it means to say that a program is means-tested .... Vaughn v. Sullivan, 83 F.3d 907, 908 (7th Cir.1996). With this in mind, we conclude that a benefit is means-tested if (1) eligibility for the benefit or (2) the amount of the benefit is determined on the basis of the income or resources of the parent, such that the benefit decreases as the parent's income increases. Therefore, for purposes of paragraph D of the Guidelines, we hold that a means-tested public assistance benefit is a benefit that includes a payment in money, or by assistance in kind, to, or for the benefit of, a person where (1) the eligibility for the benefit or (2) the amount of the benefit is determined on the basis of the income or resources of the recipient, such that the benefit decreases as the recipient's income increases. Applying this holding to the instant case, we determine that the EIC is a means-tested public assistance benefit under paragraph D of the Guidelines. As noted above, the mother qualifies for the EIC on her federal tax return. The earned-income credit was enacted to reduce the disincentive to work caused by the imposition of Social Security taxes on earned income (welfare payments are not similarly taxed) ... and to provide relief for low-income families hurt by rising food and energy prices. Sorenson v. Secretary of Treasury, 475 U.S. 851, 864, 106 S.Ct. 1600, 89 L.Ed.2d 855 (1986). Thus, though it is given effect through the tax laws, the earned income credit is in substance an item of social welfare legislation, intended to provide low income families with `the very means by which to live.' In re Searles, 445 F.Supp. 749, 753 (D.Conn. 1978) (quoting Goldberg v. Kelly, 397 U.S. 254, 90 S.Ct. 1011, 25 L.Ed.2d 287 (1970)). In discussing the nature of the EIC, it is constructive to note that the EIC is clearly distinguishable from a tax refund. While a tax refund returns to the taxpayer any overpayment of taxes withheld from wages, the earned income credit is a grant unrelated to the amount of taxes owed. In re Brown, 186 B.R. 224 (Bankr.W.D.Ky. 1995). The earned income credit is given effect through a refund, but it is not a refund of taxes previously paid. In re Searles, 445 F.Supp. at 752. If the EIC exceeds a person's tax liability, he or she receives the excess in the form of cash from the IRS as if it were an overpayment of taxes in that amount. This is known as a refundable credit. See, Sorenson v. Secretary of Treasury, supra ; Peterson v. H & R Block Tax Services, Inc., 22 F.Supp.2d 795 (N.D.Ill.1998). It is clear from its nature that the EIC fits the definition of a public assistance benefit. The credit is given regardless of the amount of tax owed and is a grant of money which is applied to a taxpayer's tax liability, and any excess will be given directly to the taxpayer due to the refundable nature of the credit. See Sorenson v. Secretary of Treasury, supra . It is equally clear that the EIC is means-tested. The amount of the credit decreases as the amount of the taxpayer's earnings increase. See I.R.C. § 32 (1994 & Supp. III 1998). See, also, Sorenson v. Secretary of Treasury, supra . Further, we find it significant that the EIC is given to the taxpayer as a refundable credit. If it were a nonrefundable credit, then a taxpayer who owes little or no taxes would be eligible for only that portion of the credit which would reduce the taxpayer's tax liability to zero. Because of the EIC's nature, if the taxpayer's tax liability is zero, he or she would nonetheless receive the credit in the form of cash from the IRS. Therefore, we conclude that the district court abused its discretion when it did not treat the mother's EIC as a means-tested public assistance benefit for purposes of paragraph D of the Guidelines. Before we proceed to calculate the child support in the instant case, however, we must address one other matter raised by the mother in this appeal. Separate and apart from the EIC, the mother makes a cursory claim that her federal income tax credit for child care is a means-tested public assistance benefit that also should be excluded from the calculation of her income for purposes of child support under paragraph D of the Guidelines. Tax credit for child care, however, is treated differently than the EIC and is specifically considered in paragraph N of the Guidelines, to wit: Child-care expenses are not specifically computed into the guidelines amount and are to be considered independently of any amount computed by use of these guidelines. Child-care expenses for the child for whom the support is being set, which are due to employment of either parent or to allow the parent to obtain training or education necessary to obtain a job or enhance earning potential, shall be divided between the parents in proportion to their parental contribution (worksheet 1, line 6) and shall be added to the basic support obligation computed under these guidelines. The value of the federal income tax credit for child care may be subtracted from actual costs to arrive at a figure for net child-care expenses. (Emphasis supplied.) We determine that, because paragraph N provides treatment for the value of the federal income tax credit for child care, the child-care credit should not again be considered in the calculation of income under paragraph D of the Guidelines. In the case at bar, there is evidence that the father pays a portion of the child-care expenses pursuant to the couple's property settlement agreement, which is not in the record. Under paragraph N, the child-care credit should have been taken into account when calculating the net amount the father owes for child-care expenses. The record, however, does not show whether the child-care credit was considered in determining the parties' child-care obligations. Without a complete record, we are unable on de novo review to determine whether the child-care credit was properly considered when figuring the net child-care liabilities of each party under paragraph N. Nonetheless, because of paragraph N, determining whether the child-care credit is a means-tested public assistance benefit for purposes of paragraph D of the Guidelines is not necessary as the credit's benefit to the parties is already taken into account by the Guidelines. Having concluded that the district court erred when it did not treat the mother's EIC as a means-tested public assistance benefit for purposes of paragraph D of the Guidelines, we must now calculate the parties' child support obligations in our de novo review of the record. In the instant case, the mother's tax liability is satisfied, independent of any taxes she has withheld from her paycheck, by operation of the EIC for which she qualifies. Although, on her tax return, the mother's tax liability is reduced or eliminated by virtue of the EIC, such reduction of her tax liability is not to be included in the calculation of child support because such reduction is attributable only to the EIC, which is a means-tested public assistance benefit. Thus, in using worksheet 1 from the Guidelines, we include the mother's federal tax liability, prior to the deduction of the EIC, on the line designated for the federal tax deduction (see worksheet below). The mother's [s]tandard deductions applicable to the number of exemptions provided by law will be used to establish the amount of federal and state income taxes. See Guidelines, paragraph El. Thus, in utilizing the standard deductions provided under the state and federal tax codes in effect on the date of the trial, we find, in our de novo review, that worksheet 1 is properly computed as follows: Mother Father Combined 1. Total monthly income from all sources (except payments received for children of prior marriages and all means-tested public assistance benefits) 2,340.00 6,042.00 ________ ________ 2. Deductions a. Taxes Federal 264.13 1,062.30 ________ ________ State 68.41 296.82 ________ ________ b. FICA 179.01 462.21 ________ ________ c. Health insurance 236.00 -------- -------- d. Mandatory retirement -------- -------- e. Child support previously ordered for other children ------- -------- f. Total deductions 511.55 2,057.33 _______ ________ 3. Monthly net income 1,828.45 3,984.67 ________ ________ 4. Combined monthly income 5,813.12 ____________ 5. Combined annual net income 69,757.44 ____________ Percent contribution of each parent 31.3% 68.7% 7. Monthly support form table 1 1,673.84 ________ 1,672.00 1,679.00 8. Each parent's share 526.49 1,147.35 --------- -------- We, therefore, conclude that the father's child support obligation is to increase to $1,147.35 per month for the parties' two minor children and, utilizing worksheet 4, to $785.75 per month when one child remains in the household.