Before making an order for child support, the judge first has to determine the net disposable income of the parent. The net disposable income is the key financial factor in calculating child support. It is computed by deducting the allowable deductions from the annual gross income.
Gross Income – Allowable Deductions = Net Disposable Income
Thus, in order to arrive at the net disposable income, we first have to determine what is included in the parent’s gross income. Due to the complexity of the calculation, many child support attorneys and the family court utilize specialized software.
Family Code §4058(a) broadly defines “gross incomes” as “income from whatever source derived, except for income that is legally exempt from the child support calculation.” Annual gross income includes both mandatory income and discretionary income.
Sources of Mandatory Income
Mandatory income is the source of income that the court must consider in computing the annual gross income of the parent. Meanwhile, discretionary income is the income that the court may or may not include in the computation of gross income, depending on the court’s discretion.
For this article, we shall tackle what constitutes mandatory income. The following items are considered as mandatory income:
- Salaries and Wages.
- Bonuses and Commissions.
- Business and Self Employment Incomes.
- Dividends and Interest.
- Pensions and Annuities.
- Worker’s Compensation Benefits.
- Unemployment Insurance Benefits.
- Disability insurance benefits.
- Social security benefits.
- Military allowances.
- Trust income.
Business and Self Employment Income
Income earned from business and self-employment must be included by the court in the computation of gross income. Business income is to be computed as gross receipts from the business reduced by expenditures required for the operation of the business.
Not all deductions may be accepted by the court in case of business income. For example, depreciation may be an appropriate deduction for tax purposes, but the court might not deduct it to reduce the income available for support.
The calculation of business income is often contested in divorce proceedings. Simply put, payors may inflate expenses to reduce net income or shift income off-books. Accordingly, when a business is involved in contested divorce proceedings representation from a local business divorce lawyer can help parties arrive at equitable divisions of community property.
Bonuses and Commissions
In including bonuses and commissions, the court must first consider whether the said bonus or commission is predictable or speculative.
Predictable Bonuses or Commissions
Predictable bonuses or commissions follow a certain pattern of payment on a regular basis. The term comes from the fact the payment of the bonus or commission is routine and follows a predictable pattern. In this case, it is appropriate for the court to average the bonus or commission income over 12 months and include it in the parent’s annual gross income.
Speculative Bonuses or Commissions
Speculative bonuses or commissions do not follow a certain pattern and are not predictable. In this case, the court may consider either of two options. The first option is to totally exclude any bonuses or commissions from the computation of the gross income. The second option is for the court to order that when that bonus or commission income is received a certain percentage must be paid as an additional support. The second option is preferred as the better practice in this instance in furtherance of the policy of providing adequate child support.
Generally, overtime earnings are to be included in the calculation of gross income. However, it may be excluded in any of the following instances:
- There is evidence that it is unlikely the overtime income will continue. For example, when there has been a change in employment conditions or the parent is no longer willing to accept voluntary overtime.
- Imputing overtime in the calculation would lock the parent into an “excessively onerous work schedule.”
Employee Stock Options
Employee stock options are to be included in the computation of the gross income when the option is exercised, such as when the stock is acquired and then sold. At the very least, income is recognized when the underlying stock is sold again. Given the sporadic nature of the stock option, the court may adjust the child support order.
Income from Gifts and Inheritances
As a general rule, proceeds from inheritances and gifts are generally not considered income for child support purposes. However, interest, rents, dividends or other forms of income actually earned from gifts and inheritance are considered income in calculating child support.