Chapter 3 – Defining and Calculating Income


There are many different definitions of income that can be used in family law cases. Local law will play a big part in defining income, but in more complicated cases, other definitions may come into play. The financial expert can help the attorneys and the court understand the various types of income and why they should be included or excluded from income calculations in a family law case.

Internal Revenue Service Definitions
The Internal Revenue Code is often a starting point for defining and quantifying income in family law cases. Experienced family lawyers know this is only the tip of the iceberg and does not cover many of the unusual situations that could arise in cases with complicated financial scenarios. However, because the Internal Revenue Service definition of income is so heavily relied upon in many divorces and child support cases, it must be addressed.

The following items are found on a personal federal income tax return. For more information on what these items of income can tell us about an individual’s income or assets, refer to the more detailed discussion in Chapter 6. A sample of a 2012 personal income tax return (Form 1040) is included in Appendix A for reference.

  • Wages—This item includes compensation such as wages, salaries, tips, commissions, bonuses, fringe benefits, and other earnings reported to an employee on a W-2.
  • Interest—Both taxable and tax-exempt interest are reported on an income tax return, although only one type will be taxed. Both types of interest should be included in calculations regarding income, regardless of the taxability.
  • Dividends—Stock dividends received via brokerage accounts or directly from individual investments will be reported here.
  • Taxable refunds or credits for state and local income taxes—This item might provide useful information during the lifestyle analysis but istypically not included in a calculation of income for support purposes. It may factor into an analysis of before-tax and after-tax income.
  • Alimony received—This item will likely not be a factor in a current divorce.
  • Business income or loss—Net income from a sole proprietorship or single member limited liability company (LLC) is reported here, with more details about income and expenses on Schedule C.
  • Capital gain or loss—Gains from the sale of stock or other investment property are included here, with the details on Schedule D.
  • Other gains or losses—This item includes the sale of property in a business, with the details reported on Form 4797.

Also included in this chapter:

Nontaxable Income
Reduction of Living Expenses
Statutes Defining Income
What Is Not Income?
Historical Earnings Analysis
Adjustments to Income
Cash Flow Versus Income
Earning Capacity and Imputed Income