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. It is therefore vital that parents understand what funds can be considered "income" under the child support guidelines, and what funds are excluded from the definition of income.
"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 of the non-custodial parent. Gross income is thus usually defined to include money received from any source, 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; investment and interest income (including dividends);
- Pension income;
- Trust or estate income;
- Capital gains, (unless the gain is nonrecurring);
- Social Security benefits;
- Veterans’ benefits;
- Military personnel fringe benefits;
- National Guard and reserve drill pay;
- Benefits received in place of earned income (i.e. 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);
- Income of a new spouse, to the extent that income directly reduces expenses of the parent;
- Alimony received from a person other than the other spouse in the present case; and
- Income from self-employment (including rent, royalties, and benefits allocated to an individual for a business or undertaking in the form of a proprietorship, partnership, joint venture, close corporation, agency, or independent contractor).
Income also includes non-money items such as employment "perks" — including use of the company car, free housing, and reimbursed expenses — when these fringe benefits reduce personal living expenses. Basically, child support guidelines include as income any source of funds available to the parent, taking into consideration all possible financial sources.
"Unrealized" Income and Child Support
Because the child support guidelines seek to define "income" as expansively as possible, the question arises as to whether "unrealized" income — income that exists only on paper but has not been received — is "income" for child support purposes. Following is a discussion of different sources of unrealized income, and states’ approaches to categorization of these sources as "income" for child support purposes.
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. Cases in Alaska, Colorado, Montana, and Ohio have held that the interest on an IRA is income for purposes of child support. Conversely, cases in New Mexico, Louisiana, Tennessee, and Virginia have held that interest on an IRA is not income for purposes of child support.
Unrealized Gains from Unexercised Stock Options. An Ohio court held that the capital gain 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. Although this case is the only one in the country to have held that capital gains from unexercised stock options are income, the trend may catch on. A recent case from Florida applied the exact same principle to state that capital gains from unexercised stock options are income for purposes of alimony.
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.
Income From a Trust. Sometimes, people will make estate planning decisions that result in fictional income — income that is reported to the Internal Revenue Service as income, but is not received. For example, in a Louisiana case, a mother’s parents made a gift to the mother of certain property in trust, which generated income. The income was then put back into the trust. Because the mother could not reach the trust, the court held that the "income" was phantom and could not be considered for purposes of child support.
Capital Gains from Stock Transactions. In a New York case, the court held that capital gains that were a tax fiction, that is, gains that are reported to the Internal Revenue Service but not received, should not be considered income for purposes of child support. Other states, however, have held that all capital gains are to be considered income for purposes of child support.