Family Law Economics, Child Support, and Alimony:Ruminations on Income, Part II

In the child support guidelines statute, there is a section about business income from “close corporations.” This likely refers to the income that shareholders of an S corporation receive. However, this can be unfair because it includes income that the shareholder may not actually receive. This is because S corporations are “pass-through” entities for tax purposes, so the income is taxed even if it’s not distributed to the shareholders. This could result in a shareholder spouse paying more alimony or child support than they can afford. This might give the shareholder spouse a reason to choose C corporation status instead, which would result in additional taxes but potentially save them money in alimony or child support payments. The category for pension, retirement, or annuity payments in divorce cases is not fair. It can disadvantage both parties because it only looks at the actual cash received, not potential income from deferred assets like annuities. This means a spouse could defer receiving payments to lower their family support obligations. There are limited ways for the court to consider these deferred assets when determining support payments. This can result in one spouse depleting their assets while investing in deferred annuities to lower their support obligations. This category is also unfair for the spouse who has to pay money. Annuity, pension, and retirement payments have both interest and principal parts. For example, let’s say there’s an annuity that pays $1,590.88 every month for 10 years. In the first month, $625 would be interest and the rest, $965.88, would be principal. Treating the whole amount as income is unfair. The $965.88 is just like taking money out of a regular bank account, not actual income. Retirement payments also face a similar problem. According to the law, only mandatory retirement contributions can be deducted, not voluntary ones. This means that the amount of money you put into your retirement fund counts as income when you put it in and again when you take it out. This doesn’t really seem fair. Social Security benefits can be manipulated through deferral, but it may result in lower benefits and increased taxes. Dividends and interest can be tricky, especially deferred interest, and including it as income for divorce settlements may not be fair. Interest earned to compensate for inflation may not be considered income for family law purposes. The analysis looks at how dividends affect investors and their decisions, and how they are treated in family law. Dividends are payments made by companies to their shareholders, and historically most stocks paid regular cash dividends. More recently, most stocks have paid small or no dividends, preferring capital appreciation instead. However, recent tax law changes reducing the tax on dividend income will likely lead to more current dividend payments. Investors will always have the choice between investments that pay substantial dividends and those that do not, and tax and family law considerations will affect these choices.

There is also a problem with the term “dividends” when it comes to stock dividends and splits. A stock split involves an increase in the number of shares, but it typically does not result in a wealth increase and should not be considered income. On the other hand, a smaller stock dividend typically does result in a wealth increase and should be considered income for family law purposes. Investors must currently pay 15 percent of any dividends to the government, and they may also need to share a portion of dividends with an ex-spouse through alimony and child support. This can have a big impact on investment decisions. The law doesn’t have clear rules about counting dividends and underperforming assets as income for child support and alimony. This means a spouse could invest in assets that don’t make much money now, but may in the future, to lower their support payments. It’s a risky move, but it could save them a lot of money in the long run. It’s not clear if a court can do anything about it, and if they can, how they would decide what to do. Rental income and income from trusts and estates are handled differently in terms of classifying marital assets. Income from rental properties is considered more passive and may not create marital assets if it comes from nonmarital property. On the other hand, income from trusts and estates does not have a specific provision for deducting expenses, unlike rental income and business income. This means that expenses may not be deducted from income from trusts and estates, even though it would be fair to do so. So, when reporting income for legal purposes, it’s important to consider how it might affect the division of marital assets. Royalties are money that people earn from things like patents, copyrights, and minerals. These are like income, but also a way to make up for the fact that the things they come from don’t last forever. When someone owns the rights to something, they can sell it for a lump sum of money or get regular payments, called royalties. The tax rules for these two types of earnings are different. This can affect how much money someone has to give their ex-spouse in a divorce. It might also give people a reason to sell their rights instead of getting royalties, which could be seen as trying to cheat the system. When it comes to minerals, there’s an extra problem. The law doesn’t take into account the fact that minerals run out, which could put one spouse at a disadvantage compared to another. Category 13 is too narrow because it only considers payments or expenses that directly reduce living expenses. It doesn’t take into account in-kind payments or other benefits that can save money or increase wealth. For example, getting a discount on travel or buying things at a lower price still increases wealth, even if it’s not a direct payment. This makes the category too limited and could lead to manipulation of the system. The category of gains derived from property is really important when it comes to figuring out how much money a parent should pay for child support. If the gains from selling property happen regularly, then they count as income for child support. But if the gains are one-time only, then they don’t count. The tricky part is figuring out when a one-time gain becomes regular. For example, if a dad owns 100 acres of land and sells it all at once, that’s one-time only. But if he divides the land into lots and sells them as a subdivision, then it becomes regular income. It can be hard to decide where the line is. This can lead to a lot of arguments and court cases. For this article, we’re not worried about the legal details – we’re more interested in what happens because of these rules. If you sell property in small pieces instead of all at once, you might end up paying a lot more in taxes. This is because the profit from each sale is taxed at a higher rate. It’s like a “tax” on the extra money you make. This can also affect how much money you have to pay in child support and alimony if you’re going through a divorce. So, it’s important to be aware of the tax consequences when making these kinds of deals. If the property is not shared with a spouse, the extra tax on these kinds of deals can be even higher. So, it’s important to consider the potential tax consequences before making these sales. The term “gains” in this category refers to the money you make after subtracting costs. This could include costs related to selling something, like a house, and other costs like overhead. The law doesn’t specifically mention costs for this category, unlike for other similar categories. If someone has to share their gains with an ex-spouse, it would make sense for the gains to be reduced by any losses they have. But if the losses are more than the gains, it’s not clear if they should still count. This could affect how much child support or alimony someone has to pay. If the losses do count, it could mean a big change in how much someone has to pay. Calculating income and assets for things like child support and alimony in family law can be really complicated. It’s important to accurately determine income and assets in the first place so that everything can be divided fairly. But, figuring out what counts as income and assets is tricky because the rules and methods for accounting are so complicated. It’s no wonder that becoming a certified accountant is hard! Family law and accounting are closely connected, but it’s not always easy to determine what counts as income when it comes to child support and property division. Some parents have jobs with stable incomes, so there’s no manipulation involved. But for parents with small businesses, it’s a big deal. The way we define income in family law may not always seem fair. Some laws allow for trusts to pay out a percentage of their value, rather than just the income they make. And when it comes to alimony, income is usually more important than assets. Any increase in the value of non-marital assets during a marriage is considered marital property, so it’s important to have a clear understanding of what income means in family law. Steven J. Willis is a law professor at the University of Florida College of Law. He is a member of the Florida and Louisiana bars and used to have a CPA certificate in Louisiana.

Source: https://www.floridabar.org/the-florida-bar-journal/family-law-economics-child-support-and-alimonyruminations-on-income-part-ii/