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May 06, 2024 Feature

Components of Income

Steven E. Juska

All jurisdictions have specific definitions of income to be considered when determining child and spousal support. Most state statutes define the term “income” and include income from any source. The following are generally included in the definition of “income” for purposes of determining a party’s support obligation:

  1. Wages, salaries, bonuses, fees, and commissions;
  2. Net income from business or dealings in property;
  3. Interest, rents, royalties, and dividends;
  4. Pensions and all forms of retirement;
  5. Income from an interest in an estate or trust;
  6. Social Security disability benefits, Social Security retirement benefits, temporary and permanent disability benefits, workers’ compensation, and unemployment compensation;
  7. Alimony if, in the trier-of-fact’s discretion, inclusion of part or all of it is appropriate; and
  8. Other entitlements to money or lump sum awards, without regard to source, including, lottery winnings, income tax refunds, insurance compensation or settlements, awards and verdicts, and payments due to and collectible by an individual regardless of source.

In each category of income there are several considerations in the final determination of a party’s income, such as the timing, nature, and availability of the income. Isues with each defined type of income will be discussed next. These should be considered in any income defined in your specific jurisdiction.

Wages, Salaries, Bonuses, Fees, and Commissions

The income in this category is the earnings the party receives for performing work. It is generally reported to the party and IRS on forms W-2, or 1099, and details can often be found on year-end paystubs. In situations where bonuses are variable or paid at a specific time of the year, it is important to consider timing of cash flow. An award based on total income may create month-to-month cash flow shortages if a large percentage of the annual income is paid in one bonus check. It may be necessary to negotiate monthly payment on the regular monthly income with similar percentages applied to the bonus when it is paid. Taxable wages can also be reduced by voluntary deferrals such as retirement plan contributions. These contributions could be considered available for support in your jurisdiction, but the tax impact on these contributions had they not been deferred should be considered.

Net Income from Business or Dealings in Property

Net income from an operating business or rental income from property may seem straightforward at first blush as the income is reported on a corporate income tax return and the Party’s K-1 if the entity is a pass-through entity. However, there are many ways in which the reported income may differ from the actual benefits received or available to the business interest holder.

For example, many ordinary business expenses, such as meals, entertainment, travel, and phone services, as well as automobile costs such as lease or loan payments, fuel, and repairs, often contain a personal component. While these can be legitimate business expenses, the personal use component may be substantial, and these perquisites can be a meaningful source of income to a business owner that is not captured in reported income.

Consideration of perquisites is critical in the pendency of the litigation prior to equitable distribution. Once the business is valued, the expert and attorney must clearly understand how the perquisites were treated in the business valuation to avoid counting the perquisites in both the support calculation and the business valuation.

In addition, one must consider other nonbusiness expenses paid by the business on behalf of the owner that reduce profit of the business. These can include nonbusiness related meals and travel, nonemployed family members on the payroll, or anything else you can imagine like boats, vacation homes, private school and college tuition. Assessment of perquisites will require a detailed review of the business expenses, credit cards, and bank accounts. A discussion of the pre-divorce lifestyle and spending habits should help shed light on these potential issues.

Cash flow is also a critical consideration of income from a business or property. In the case of an operating business, the distributions received should be considered relative to the reported income. It is often necessary for a business to reinvest earnings in facilities or equipment in order to achieve projected growth; therefore, all the earnings may not be available for distribution. In addition, minority interest holders may not have the ability to make distributions. It is important to understand the business agreements that govern distribution or dividend policy.

In other instances, the owner may leave distributable income in the business to avoid it being included in an income calculation. Another tactic business owners may use to alter their reported distributions is to classify a cash flow to themselves as a shareholder loan rather than as a distribution. This may be done for tax timing purposes or to manipulate the reported distributions that will be used in a support calculation.

One further consideration when reconciling income and distributions is timing. For many private businesses, distributions are made to cover tax payments, and tax payments do not always correspond to the year the income was earned. For example, a business with high reported profits in a given year may make a large distribution the following April to cover tax payments. This can create a mismatch between the current year’s income and the current year distributions when profitability of a business varies significantly from year to year.

When analyzing income from rental properties, depreciation and amortization may be considered an add back to income as they are noncash expenses that do not reduce cash flow available. Required capital maintenance and improvements, or reserves for those purposes, should also be considered.

Interest, Rents, Royalties, and Dividends

The source of interest and dividends must be considered. Investment portfolio interest and dividends are usually reinvested in the portfolio and not considered in income during the pendency of the litigation as they will be captured in the value of the portfolio at the time of equitable distribution. They may be included in income calculations after equitable distribution as they are available to the owner of the portfolio.

Rents would fall under income from properties discussed previously. Royalty streams generally should be includable in income.

Pensions and All Forms of Retirement

If pensions and retirement are in payout phase, the income should be includable in an income calculation. However, depending on your jurisdiction and the treatment of the pension and retirement account in equitable distribution, there could be arguments made that these payments are distributions of an asset that was previously addressed through a qualified domestic relations order or other arrangement.

Income from an Interest in an Estate or Trust

Income from a trust or estate is generally includable as income. In the case of a trust, it is important to review the trust agreement to understand the terms of the trust. Does it require income be paid out? On what terms? Is the income in fact paid out as the trust requires? If income is accumulated in the trust, it could be includable in the income calculation if the trust is supposed to pay out the income to the beneficiaries or if the beneficiaries have discretion on the payouts.

It is also critical to consider the nature of the distributions from the trust as they could be principal distributions that may not be includable in the income calculation.

Social Security Disability Benefits, Social Security Retirement Benefits, Temporary and Permanent Disability Benefits, Workers’ Compensation, and Unemployment Compensation

Since all of these benefits are intended to replace earned income, they would be includable in the calculation of income available for support.

Unlike elective deferrals to retirement accounts, payment of Social Security is a required payment that reduces current period income. In other words, the marital estate did not have this income available during the marriage. The income is required to be deferred to future periods and should be included when it is received.


Typically, one calculates income before the payment or receipt of alimony associated with the litigation so one can assess the true income available and properly allocate taxes. To the extent a party is receiving alimony from a prior litigation, it could includable in the calculation.

Other Entitlements to Money or Lump Sum Awards, without Regard to Source

These types of entitlements include lottery winnings, which could be includable in income but may be better addressed through equitable distribution. Depending on the payment terms, a lump sum payment could create a cash flow issue if support were based on income including the lump sum. In the case of a postequitable distribution calculation of income or ongoing child support, lottery winning’s could be considered but would most likely create a large payment that would be subject to revision for a change in income in the next period.

Regarding income tax refunds, it is best to allocate the actual taxes due on income streams used for support calculations, which eliminates the need to include excess withholding or payments that result in a refund. A refund in a separation year is best handled via equitable distribution.

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Steven E. Juska


Steven E. Juska, ASA Accredited Senior Appraiser—American Society of Appraisers, is the managing director in the Forensic and Financial Services Group at CBIZ MHM, LLC, in West Conshohocken, Pennsylvania, where he provides business valuation, intangible asset valuation and litigation support services.