Every year individuals file tax returns reporting the income they earned in the prior year for the purposes of paying their federal and state income taxes. However, a taxpayer’s income as reported on his or her tax return is only a starting point and is not necessarily the income a court will consider in determining a payor’s income available to pay support. The court is required to look beyond the tax return and determine actual cash flow available in rendering a support award.
The statutory definition of income in Pennsylvania is defined by 23 Pa. C.S.A. §4302 and is very broad. For example, it includes compensation for services, income derived from business, gains from the sale of property, interest and dividends, rents, royalties, income from life insurance and endowment contracts, retirement income, income from discharge of indebtedness, income from partnerships, income from an interest in an estate or trust, social security benefits, disability benefits, workers’ compensation and unemployment compensation, other entitlements to money or lump sum awards, lottery winnings, insurance compensation or settlements, awards or verdicts, and any form of payment due to and collectible by an individual regardless of source.
In addition, Rule 1910.16-2 of the Pennsylvania Rules of Civil Procedure provides that the amount of support is based upon the parties’ monthly net income. The Rule states that “income” is defined by the statute above and includes income from any source. Monthly net income is arrived at by taking a party’s monthly gross income and subtracting only (1) federal, state and local income taxes; (2) unemployment compensation taxes and Local Services Taxes; (3) F.I.C.A payments (Social Security, Medicare and Self-Employment taxes) and non-voluntary retirement payments; (4) mandatory union dues; and (5) alimony paid to the other party.
If a party is a W-2 wage earner, calculating his or her income available for support is usually straightforward. It can be more complicated if a party is self-employed and/or owns his or her own business or has an interest in a partnership. For example, shareholder and partnership advances as reflected on a K-1 may be considered income for support purposes. Expenses that are paid by a party’s employer or paid by their business but are really personal expenses, such as payment of automobile expenses, entertainment or meal expenses, may be added back and included in the party’s income. Also, capital gains reported from the sale of an asset may be included in a party’s income for support. The depreciation of an asset may be added back to income depending on the nature of the asset and the reason for the depreciation. Further, retained earnings may be considered income depending on whether they are reinvested back into the business and what kind of control the payor spouse has with respect to paying out the retained earnings. If it looks like the spouse is deliberately withholding income from being paid out to him that is otherwise available for support, a court will likely include it. With respect to interest and/or dividend income, if the assets generating the interest and dividend income constitute marital assets subject to division as part of a divorce, the parties will need to decide if the income should be included for support or not included and divided as part of the property distribution. It may not be included in both as that would be an improper double dip.
If the sources of your or your spouses’ incomes are complex, you may want to engage a forensic accountant to review the business and corporate records of the company, including a review of how expenses are paid and whether personal expenses are being paid by the business in order to determine actual cash flow available for support.