With 2018 coming to a close, divorced parents may be expecting a year-end bonus or other forms of extra income. Whether the funds will purchase a Disney vacation or go toward household necessities, parents should understand how bonuses, and other types of extra income, impact child and spousal support.
PS attorneys describe various forms of extra income and considerations for calculating support orders.
It is important to remember that the money you receive into your own pocket as a bonus is not the number the court uses to calculate the support amount due based on the bonus income. The California guideline calculators use gross income, a parties’ deductions and (in cases of child support) the amount of time each party spends with the child to reach the parties’ adjusted net incomes and the support amount. Sometimes the support you pay on a bonus seems disproportionate to the bonus you are paid — it often is because of what that additional income does to your income for tax purposes. Be sure to consult with a tax expert to ensure you are claiming the right deductions so that you are paying or receiving the correct amount of support.
For child support purposes, the annual gross income of each parent means income from whatever source derived, which includes bonuses, commissions, and overtime. The problem is that this type of income is rarely guaranteed and the amount can change from year to year. As a result, there are two common ways to deal with bonus income when calculating support. The first approach is to average your yearly income, factoring in any bonuses, overtime, and commission. This makes it easier to enforce via wage garnishment, but may result in the supporting spouse paying a large monthly obligation that can often times exceed their monthly net income. The second approach is to calculate support using the parties’ base pay and set a fixed percentage of all bonus income to be paid as additional support. This helps account for the uncertainty of not knowing how much the bonus will be, but can lead to trouble with calculations or difficulties with enforcement.
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.
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.