In California, before child support can be calculated the court must total the parent’s Gross Income. Family Code Section 4058(a) takes a broad definition of “gross income” as including income from whatever source derived except for income that is legally excluded in the child support calculation. (Examples of legally excluded forms of income include child support received and need-based public assistance [See Family Code 4058(c)]).
Gross income is comprised of mandatory forms of income itemized in Family Code Section 4058(a) and discretionary forms of income, but in certain circumstances, the family court can replace actual income (such as rental income) with earning capacity (such as imputed rental income from a vacant property).
Mandatory Income from Assets
Income actually derived from assets is included in gross income when calculating child support. Forms of income from assets that must be included in gross income include rental income, business income, royalties, dividends and interest, pensions and annuities, and trust income.
Earning Capacity; Imputing Income From Assets
The court has discretion to replace a parent’s actual income with their earning capacity in certain instances, including a parent’s ability to receive income from assets. In essence, earning capacity is not solely confined to the income received from work. The reason for this is because some parents may try to avoid their child support obligations by underutilizing income-producing assets. In one example, earning capacity was imputed to a parent who elected to defer salary in favor of investment in the company, but continued to live extravagantly off of sizable assets, precluding the children from sharing the benefits of the parent’s current standard of living. Moreover, the court may even take earnings from investment assets into account when computing child support.
Non-Income Producing Assets
The assets don’t even have to be income-producing assets before the court can impute earning capacity. In one case, the rate of return was imputed to non-income producing real estate assets that were the parent’s separate property. A court’s discretion to charge a reasonable rate of return to an investment asset does not depend on an income-producing history for the asset. The rate of return must, however, be established generally by expert testimony.
When a parent possesses substantial wealth, the court may consider the substantial wealth of the parent under the principles that a parent must support his or her children according to the parent’s circumstances, station in life, and ability; and that children should share in their parent’s standard of living.