In cases involving child support, spousal support and alimony, one of the primary issues for the court to decide is how much income each parent or spouse is earning. In fact, figuring out net income is perhaps the most critical and most litigated issue in support cases. The guidelines place primary emphasis on the incomes of the parents rather than expenditures. What sounds like a simple matter is actually quite sophisticated, as the law creates a unique definition of net income for support actions. Tax returns show taxable income and pay stubs show take-home pay, but net available income for support and alimony cases may be quite different. At Pollock Begg, we are routinely asked to calculate net income for support and alimony cases, and many of our attorneys teach other lawyers and judges around the state.
What is considered net income for support cases?
These determinations begin with a definition of net income provided by Pennsylvania law (see 23 Pa.C.S. 4302, as follows):
“Income Includes compensation for services, including, but not limited to, wages, salaries, bonuses, fees, compensation in kind, commissions and similar items; income derived from business; gains derived from dealings in property; interest; rents; royalties; dividends; annuities; income from life insurance and endowment contracts; all forms of retirement; pensions; income from discharge of indebtedness; distributive share of partnership gross income; income in respect of a decedent; income from an interest in an estate or trust; military retirement benefits; railroad employment retirement benefits; social security benefits; temporary and permanent disability benefits; workers’ compensation; unemployment compensation; other entitlements to money or lump sum awards, without regard to source, including lottery winnings; income tax refunds; insurance compensation or settlements; awards or verdicts; and any form of payment due to and collectible by an individual regardless of source.”
This statute has been interpreted by the trial and appellate courts many times over the past three decades. Since the mid 1980s, the Pennsylvania courts have held that net disposable income for support purposes is not the same as taxable income. In most cases, the definition of net disposable income is more expansive than taxable income. It may include bonuses, voluntary retirement contributions, tax-exempt interest income, depreciation, business income, capital gains, perquisites, rental income, trust income and many other types of cash flow, whether or not reported on a tax return.
How is earning capacity considered in support cases?
When a spouse or parent is unemployed or underemployed, the court may consider his or her earning capacity. This does not mean a spouse or parent is forced to work unwillingly; it means that the support obligation will be calculated as though the unemployed spouse was working. In determining earning capacity, the court must look not to what the spouse could theoretically earn, but what he or she could realistically earn under the circumstances, considering the spouse’s health, age, mental and physical condition, training and time out of the workforce. A part-time earning capacity may be appropriate when a parent or spouse has historically worked part time and has not refused work or developed other marketable skills. On the other hand, the court may impute an earning capacity to a party who is not working up to his or her earning potential. A spouse or parent who is unemployed must make reasonable efforts to maintain income, even if he or she was laid off.
Because net income is such an important key to support proceedings, it is critical to have experienced counsel on your side when negotiating or litigating in court.
Call Pollock Begg to take advantage of our decades of experience in advising clients through child support, spousal support and alimony involving complex income situations.