Child Support: Determining Parents' Income

One touchstone of state guidelines for setting child support is that the final support award is "income driven" -- determined primarily by the income of the parties. Therefore, it's very important that parents understand what funds can be considered "income" under the child support guidelines. It's very important for parents to understand what funds are excluded from the definition of income.

Determining Income for Purposes of Child Support

Each state's child support guidelines contains a definition of "gross income." At the very minimum, pursuant to federal law, the definition of "income" must take into consideration all income and earnings from both parents. Gross income is usually defined to include money received from any sources, including, but not limited to:

• Salaries and wages, including tips, commissions, bonuses, profit sharing, deferred compensation, and severance pay
• Income from overtime and second jobs, income from contractual agreements, and investment and interest income (including dividends)
• Pension income
• Trust or estate income
• Annuities
• Capital gains unless the gain is nonrecurring in some states, in which case it may be necessary to prove at a later time that it occurred only once
• Social Security benefits
• Veterans' benefits
• Military personnel fringe benefits
• National Guard and reserve drill pay
• Benefits received in place of earned income, examples of which are workers' compensation benefits, unemployment insurance benefits, strike pay, and disability insurance benefits
• Gifts and prizes, including lottery and gambling winnings
• Education grants, including fellowships or subsidies, that are available for personal living expenses
• Alimony received from a person
• Income from self-employment

Examples of income from self-employment could be rent, royalties, and benefits allocated to an individual for a business or undertaking in the form of a proprietorship. These could also take the forms of partnerships, joint ventures, close corporations, agencies, or independent contractors.

Income also includes non-money items such as employment "perks," including use of the company car, free housing, and reimbursed expenses. This is true when these fringe benefits reduce personal living expenses. Basically, child support guidelines include income from any source of funds available to the parent. These guidelines take into consideration all possible financial sources.

"Unrealized" Parental Income and Child Support

Because the child support guidelines seek to define "income" as broadly as possible, the question arises as to whether "unrealized" income is "income" for child support purposes. "Unrealized" income is income that exists only on paper but has not been received. Following is a discussion of different sources of unrealized income, and states' approaches to categorizing these sources as "income" for child support purposes.

1. Individual Retirement Accounts (IRAs) - A common question in determining child support is whether the interest that is earned on an IRA should be considered "income" when the interest is not withdrawn but merely reinvested back into the IRA.

2. Unrealized Gains from Unexercised Stock Options - In one case, court in Ohio held that the capital gains an employee could realize from exercising stock options was to be considered "income" for purposes of child support, even though the options had not yet been exercised. This is rare, however.

3. Retained Earnings of a Corporation, Partnership, or Sole Proprietorship - States are quite divided on whether retained earnings of a corporation, partnership, or sole proprietorship should be considered income for purposes of child support. Some states have held that the retained earnings of a business are income for purposes of child support, while others determine that such income is not. Still, other states take a middle ground -- holding that whether retained earnings of a business are income will depend on whether the parent paying support is a majority owner of the business and is thus entitled to the retained earnings.

4. Income From a Trust - Sometimes, people will make estate planning decisions that result in fictional income. Fictional income is income that is reported to the Internal Revenue Service as income, but is not received.

5. Capital Gains from Stock Transactions - In a New York case, the court held that capital gains qualifying as "tax fiction," should not be considered income for purposes of child support. The term "tax fiction" refers to gains that are reported to the Internal Revenue Service but not received. Other states, however, have held that all capital gains are to be considered income for purposes of child support.

Get Legal Help Determining a Parent's Income for Child Support

Do you really know how much income your spouse makes? Even if you know their annual salary, you may not realize that they have additional income that they'd rather not disclose. An attorney can bring these other sources of income out of the shadows and help you get the financial support your child needs to thrive. Find an experienced family law attorney near you for some peace of mind.