Is a Tax Refund “Income” When Computing Child Support?

The obligation to provide child support in Virginia is purely statutory and distinct from a number of different states. Virginia begins the calculation of child support based upon the gross income of the parents. 

However, issues often arise when one of the parents receive a substantial federal or state income tax refund in one year on income that was earned and withheld in a prior year. 

Question: Should tax refunds be included as part of a parent’s current gross income? 

Answer: Because there are not many cases within the State of Virginia that address how tax refunds should be treated for child support calculation purposes, we are obligated to look to the Virginia Code.

The Virginia Code instructs that Virginia courts are to include “all sources of income” except for certain enumerated categories. 

However, this is vague. Other states have had similar issues come up and have concluded that tax refunds are not to be included as income if a state bases its child support calculation on “gross income.” 

Net Income v. Gross Income

States that use the “net income” method of calculation, meaning that they take out taxes and other permissible deductions from the beginning, are allowed to include the tax refunds to offset the taxes that are actually paid. 

However, Virginia is a state that uses the “gross income” method. In this method, tax refunds are based on income earned within a prior year and therefore should not be included in the gross income calculation for the current year. 

When it comes to child support calculation, §20-108.2(C) of the 1950 Code of Virginia defines “gross income” as “all income from all sources, and shall include, but not be limited to, income from salaries, wages, commissions, royalties, bonuses, dividends, severance pay, pensions, interest, trust income, amenities, capital gains, social security benefits except as listed below, workers’ compensation benefits, unemployment insurance benefits, disability insurance benefits, veterans’ benefits, spousal support, rental income, gifts, prizes or awards.”

With this, Virginia courts have found “any income from any source is subject to inclusion [as gross income] unless specifically excluded.” Rieger v. Rieger, 90 Va. Cir. 29, 31 (Fairfax Cir. 2015) (citing Frazer v. Frazer, 23 Va. App. 358, 377-378 (Ct. App. 1996). 

Yet, the legality of this question is concerning as certain “income” such as veterans benefits are “non-taxable income” and are often not reported on tax returns. In states such as California, social security benefits and veterans benefits are “off-limits” when it comes to debt collectors seeking liens on accounts. However, this is a different matter to discuss. 

State Income Tax Refunds v. Federal Income Tax Refunds

State income tax refunds are taxable if the taxpayer itemized their deductions and claimed a State income tax deduction, because that income was not taxed in the year earned. See IRS Publication 525, p. 23-24 (2018). 

The IRS never considers Federal income tax refunds as income and only considers State income tax refunds to be income if previously deducted. 

Since Virginia does not engage in re-calculating a party’s tax deductions – like “net income” states – there is no need to distinguish this type of tax refund received because all taxable income was earned in the prior year. 

Conclusion

If Virginia were to include tax refunds when calculating gross income for child support purposes, such a calculation would be tantamount to double counting the same earned dollar in the year earned (Year 1) and the year the tax was refunded (Year 2). Such double counting would be inaccurate and inequitable. One may rightfully assume that if this issue were analyzed by a Virginia court, it would resolve the issue in the same manner as the other “gross income” state courts that have reviewed the matter.