Getting a holiday bonus? Understand what constitutes “income” for determining child and spousal support.

With the holidays approaching and the year coming to a close, some divorced parents are looking forward to a year-end bonus. Whether the check will purchase necessities or provide for a Disney adventure, parents should understand how bonuses, and other types of extra income, impact child and spousal support.

Our FPS attorneys offer their Quick Takes on various forms of extra income and how those earnings are treated by support orders.

 

Neil M.E. Forester Family Law AttorneyNEIL FORESTER

Occasionally a corporate entity will allocate “pass-through” or “phantom” income to a shareholder solely for purposes of satisfying a corporate tax obligation that the tax code indicates must be allocated between the shareholders in some amount. Though on the face of the transaction, it appears that the individual shareholder receives a distribution of what could be a significant sum, if those funds are never actually distributed to the shareholder, but rather go directly to pay a tax obligation from the corporation to the taxing authorities on the shareholder’s behalf, these sums should be exempt from consideration for either child or spousal support, as the shareholder spouse never actually receives the funds and thus cannot pay additional support from those sums.

 

Keeley L. Nickelson, Family Law AttorneyKEELEY NICKELSON

Just because a bonus or commission isn’t part of your regular wages doesn’t mean they aren’t considered in a calculation for child and spousal support. If the support payor gets regular bonuses, you might have, or want, a bonus schedule in your support orders. This schedule outlines exactly how much support will be owed, no matter how big or small the bonus.

Another strategy is to look at the bonuses and/or commissions the payor receives in order to determine a monthly average. In that case, the extra income is simply added into your monthly income. Be wary of this option if you are the payor though – you’ll have to budget accordingly for months when you don’t necessarily get a bonus!

 

MATTHEW PURCELL

It is fairly common for people to be given stock, stock options or RSUs as additional compensation, particularly as holiday bonuses. While this is not spendable, liquid income, it can be considered by the court as income for purposes of determining spousal or child support.  Depending on the marital status, these conferred interests could also be considered as assets to be divided. The confusion often comes with how it should be considered, as income or asset.

Unfortunately, there is no bright line rule, and each case is usually different. But the key factors to look at are 1) when the compensation is given, 2) when it was earned, 3) if there was an employment agreement dictating the specific amounts of stock to be given, 4) as well as when the conferred interest actually vests. In cases I have handled, because there is no clear rule, the important thing to keep sight of and to remind the court is that the stock, stock option or RSU has to be handled as either income or asset, not both.

 

image of Rebeca C. Christianson, Family Law AttorneyREBECA CHRISTIANSON

Usually, vacation time, or paid time off (“PTO”), is not included in a person’s income for the purposes of calculating support since PTO hours are used to supplement pay periods when an employee takes time off from work in order to receive a full paycheck. Overtime hours, however, are included in a support calculation since overtime results in extra income for an employee in a given month.

There are 2 methods for dealing with overtime pay: 1) taking an average of the last 12 months of overtime pay and adding it on to a person’s monthly income, or 2) using an overtime table. Using the average of overtime pay is not the ideal scenario since an employee usually has no control over how much overtime is available and may end up earning a lot less in a month. An overtime table is preferable because tells a payor exactly how much extra to pay for support based on overtime earnings in a particular month.

 

MICHELLE STOWELLmichelle-stowell

With the self-employed, there are many tax deductions that the Federal and State governments allow, but are added back to one’s income for purposes of calculating support. For example, a self-employed person is permitted under tax law to deduct costs associated with a home office. Because this expense isn’t one that is coming directly “out of pocket,” the court will add this deduction back to that individual’s income for purposes of calculating child and spousal support.  Similarly, the court will add depreciation of furniture or equipment back into a person’s income unless that individual is actually paying these costs.

The rule of thumb is – if you are not actually incurring an expense, a family court will likely add that tax deduction back to your income for purposes of calculating support even if it is a legitimate tax deduction on your Federal and/or State income taxes.

 

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Based in Folsom, California, Forester Purcell Stowell PC can be reached at info@foresterpurcell.com or 916 293 4000. This information is general in nature and should not be construed as legal advice.

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