Child Support: Determining Parents' Income

Because the basic child support obligation is based on income, parents must understand what funds can be considered income under the child support guidelines. It's also essential for parents to understand what funds are excluded from income.

Calculating Child Support

While income plays a prominent role in setting the amount of support, custody of the child is also important. The number of children supported is also considered. Typically, the non-custodial parent pays the parent who has physical custody.

Whether you're the paying parent or the parent who receives child support, you want to know how much child support will be paid. You might use a child support calculator to estimate the guideline amount. Your state has a formula for calculating child support. The formula usually begins with the parents' monthly income.

Determining Income for Purposes of Child Support

Before the court sets a child support amount for the child support order, the judge considers the state law in their jurisdiction. Each state's child support guidelines give guidance for a child support amount. The guidelines also include a definition of gross income. The definition of income must consider all earnings from both parents.

States vary, but there is a lot of uniformity. Typically, a parent's gross income includes money received from any source. This list is not exhaustive. Sources include:

• 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: 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 and educational expenses
• Alimony/spousal support received
• Income from self-employment

Examples of self-employment include rental income from real estate property. Or royalties and benefits allocated to an individual under a business/proprietorship. This also applies to various forms, including partnerships, joint ventures, close corporations, agencies or independent contractors.

Non-money items or employment "perks," including using a company car, free housing, and reimbursed expenses, are income. This is true when these fringe benefits reduce personal living expenses. Note these nice perks can produce income tax implications.

Child support guidelines include income from any funds available to the parent. You figure out the net income after you get the parent's gross income. Remember that a child dependency exemption impacts the net income.

You can subtract some items from the gross income to reach the net income. This includes:

• Actual state and federal income taxes
• Taxes from Social Security and Medicare
• Payroll deductions for retirement, union dues, or state disability insurance
• Health insurance premiums for parents and child
• Deductions for major financial hardships — used if the judge finds that it's necessary for a parent's special needs, like for health care or major medical expenses

'Unrealized' Parental Income and Child Support

Because the child support guidelines seek to define income as broadly as possible, the question arises about whether "unrealized" income is income for child support cases. "Unrealized" income 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 payments.

1. Individual Retirement Accounts (IRAs) — A common question in determining child support is whether the interest earned on an IRA should be considered income when the interest is not withdrawn but merely reinvested into the IRA.
2. Unrealized Gains from Unexercised Stock Options — In one case, a court in Ohio held that the capital gains an employee could realize from exercising stock options was to be considered income for child support, even though the options had not yet been exercised. But this is rare.
3. Retained Earnings of a Corporation, Partnership, or Sole Proprietorship — States are divided on whether retained earnings of a corporation, partnership, or sole proprietorship should be considered income for 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 make estate planning decisions resulting 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 child support purposes. Tax fiction refers to gains reported to the Internal Revenue Service but not received. Other states have held that all capital gains are to be considered income for child support.

Modifying a Child Support Order

Either parent can ask for a change in court-ordered support. A change in the amount of time the parent spends with the child, or a change in a child's needs are modification reasons. Because income is tied to the child support amount, a change in income is a possible reason for the modification. Some courts do not consider a new spouse's income a valid reason to change child support.

Imputing Income

The paying parent may change their income to avoid their child support obligation. They remain unemployed or underemployed on purpose. The non-paying parent can request that the judge "impute" income. This means that the judge assigns the parent income they are not earning. They credit the parent with income equal to their earning capacity. The custodial parent must prove that the parent could be making more money. Or that the paying parent is hiding funds. You can use the other parent's tax returns, employment history, or educational history as potential proof.

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

Child support amounts depend on the income of both parents. Do you know how much income your spouse makes? Even if you know their annual salary, you may not realize that they have more 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 child support attorney near you for peace of mind and sound legal advice.