Apr 18, 2011

“Net Income” for Child Support Purposes

A common sense approach to the trend in Illinois lawA frequent question for family law practitioners is, what is “net income” for child support purposes? The law on this issue has been evolving over the decades since the enactment of the child support statute, which defines net income as the total of all income from all sources, minus certain specified deductions. Net income for child support purposes is not the same as reported income for federal and state tax purposes, and courts are increasingly looking at cash flow (i.e., what someone uses to pay his/her expenses) as opposed to what is properly declared as income for IRS purposes.The child support statute also sets out guidelines that are presumed to be the correct amount of child support; however, the court may deviate from them. A common basis for deviating downward from the guidelines is the obligor’s high income, in which case the utility of the statutory guidelines decreases. The guidelines were not intended to create windfalls, but to ensure adequate support payments for the upbringing of the child.The emerging focus on “cash flow” is not unique to divorce. The focus on “cash flow” and “lifestyle” are common inquiries for the IRS in cases being reviewed for possible under-declared or improperly declared income. Two key questions emerge:(1) How much money are the parties spending versus what they are declaring; and/or (2) How are the parties living versus what are they declaring as income?Significant discrepancies in regard to either inquiry raise red flags, a warning that there may be undisclosed or under-reported income. If parties have one or two primary accounts out of which they pay expenses, the amount they are spending as opposed to what they are declaring is a preliminary inquiry which has great value. There may be legitimate reasons for the discrepancies: People may be living beyond their means, using increasing debt to fund a lifestyle, cannibalizing assets to fund such discrepancies, or experiencing legitimate business expenses. Three relatively recent cases highlight the trend in the law to focus on “cash flow.” InIn re Marriage of Baumgartner, 384 Ill.App.3d 39 (1st Dist. 2008), proceeds from the sale of a residence that were reinvested in a second residence did not improve the parties’ cash flow and were not income for child support. InIn re Marriage of Lindman, 356 Ill.App.3d 462 (2d Dist. 2005), retirement account distributions used to pay expenses were viewed as income for child support. InIn re Marriage of Rogers, 213 Ill. 2d 129 (Ill. 2004), loans from parents not subject to taxation, utilized for living expenses, and then forgiven were deemed income for child support. This trend indicates the need to focus on what people are spending and what lifestyle the child would have enjoyed had the marriage not been dissolved, not what the obligor declares as income for tax purposes. Where there is a question of net income, one must start with the tax returns, but the inquiry should not end there.

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