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Income of the Parties in Kentucky Divorces

Accurate income information is essential in all divorce and child support cases -- from the simplest case to the most complex one. The court uses this information to assess everything from the fee for mediation to awards of child support, maintenance and attorney's fees.

One of your most important responsibilities as a client in a divorce case is collecting any documents which will verify your income or that of your spouse.

In many situations, the parties' respective income records will come from tax returns, paycheck stubs, W-2s and 1099s.

But what if your spouse is self-employed or runs the family business?

There are many ways to determine what his/her true income really is, though it may be necessary to hire a forensic accountant to get the proof you will need.  Also, the court must take into account all manner of compensation.

KRS 403.212(2) states in its detailed discussion of the Kentucky child support guidelines:

 (2) For the purposes of the child support guidelines:

(a) "Income" means actual gross income of the parent if employed to full capacity or potential income if unemployed or underemployed.

(b) "Gross income" includes income from any source, except as excluded in this subsection, and includes but is not limited to income from salaries, wages, retirement and pension funds, commissions, bonuses, dividends, severance pay, pensions, interest, trust income, annuities, capital gains, Social Security benefits, workers' compensation benefits, unemployment insurance benefits, disability insurance benefits, Supplemental Security Income (SSI), gifts, prizes, and alimony or maintenance received. Specifically excluded are benefits received from means-tested public assistance programs, including but not limited to public assistance as defined under Title IV-A of the Federal Social Security Act, and food stamps.

(c) For income from self-employment, rent, royalties, proprietorship of a business, or joint ownership of a partnership or closely held corporation, "gross income" means gross receipts minus ordinary and necessary expenses required for self-employment or business operation. Straight-line depreciation, using Internal Revenue Service (IRS) guidelines, shall be the only allowable method of calculating depreciation expense in determining gross income. Specifically excluded from ordinary and necessary expenses for purposes of this guideline shall be investment tax credits or any other business expenses inappropriate for determining gross income for purposes of calculating child support. Income and expenses from self-employment or operation of a business shall be carefully reviewed to determine an appropriate level of gross income available to the parent to satisfy a child support obligation. In most cases, this amount will differ from a determination of business income for tax purposes. Expense reimbursement or in-kind payments received by a parent in the course of employment, self-employment, or operation of a business or personal use of business property or payments of expenses by a business, shall be counted as income if they are significant and reduce personal living expenses such as a company or business car, free housing, reimbursed meals, or club dues.

(d) If a parent is voluntarily unemployed or underemployed, child support shall be calculated based on a determination of potential income, except that a determination of potential income shall not be made for a parent who is physically or mentally incapacitated or is caring for a very young child, age three (3) or younger, for whom the parents owe a joint legal responsibility. Potential income shall be determined based upon employment potential and probable earnings level based on the obligor's or obligee's recent work history, occupational qualifications, and prevailing job opportunities and earnings levels in the community. A court may find a parent to be voluntarily unemployed or underemployed without finding that the parent intended to avoid or reduce the child support obligation.

(e) "Imputed child support obligation" means the amount of child support the parent would be required to pay from application of the child support guidelines.

(f) Income statements of the parents shall be verified by documentation of both current and past income. Suitable documentation shall include, but shall not be limited to, income tax returns, paystubs, employer statements, or receipts and expenses if self-employed.

A Word About Divorce and Taxes

One extremely important and revealing source of financial information used in marriage dissolution is tax returns.  In complex divorces, tax issues can play a major role in the resolution of the case.

The following general rules are intended to alert you to issues and provide you with general information.  Before you sign or take any actions with respect to your federal or state income tax returns, review your situation with your tax adviser.

  • If both you and your spouse sign a joint income tax return, each of you can be held responsible for all of the taxes due.
  • If you are separated from your spouse, do not sign or file a joint return without first clearing it with your attorney.
  • If you are having trouble securing past joint tax returns, you can get them directly from the Internal Revenue Service by submitting IRS Form 4506.
  • You can obtain copies of the last four years of Kentucky tax returns by sending a letter to the Department of Revenue with both parties' Social Security Numbers and a copy of your photo identification.
  • You can officially notify the IRS that you have changed your mailing address from the address used on your last tax return by filing IRS Form 8822. You should not do this without consulting your tax adviser, as there may be circumstances under which it may not be appropriate.
  • At the time of this writing, spousal support, or alimony, is taxable to the recipient spouse and deductible from the income of the payer spouse if all IRS requirements are met. However, you and your spouse may elect not to make spousal support or alimony taxable.
  • There are some very technical requirements imposed by the IRS with respect to deductibility of spousal support or alimony. Your attorney or accountant can help you understand these rules.
  • Child support payments are not deductible from the income of the spouse paying nor are they taxable to the recipient spouse.
  • Generally, the custodial parent will be entitled to claim the dependency exemption on his or her income tax return. The custodial parent (the parent who has custody) may execute IRS Form 8332, releasing the dependency exemption to the non-custodial parent. Some states will determine who gets the dependency exemption and require the other spouse to sign a waiver.  In situations where the parents alternate claiming a child, they may need to exchange corresponding IRS Form 8332s documenting the fact that one of them claims the child in even-numbered years and the other parent claims the child in odd-numbered years.
  • Generally, there is no tax gain or loss recognized as a result of the division of property between spouses upon divorce. Thus there is no tax incurred by dividing the property.
  • It is important to know the basis of the property that you receive in the division of assets. This basis is generally the cost of acquiring a capital asset. If the asset has appreciated, the person who receives that asset will be responsible for tax on the appreciation when the asset is sold.
  • When you and your spouse sell your jointly owned residence, you will each be responsible for reporting half of any capital gain (the profit resulting from the sale of capital investments). To defer the tax, each spouse must purchase a new residence within two years. The new residence must cost at least half the sale price of the old.
  • If you or your spouse are over age 55, or nearly 55, you should be alert to the once-in-a-lifetime exclusion of $125,000 of gain on the sale of a residence. If you meet the criteria and sold the residence while married, only one exclusion is permitted. If you terminate the marital status before the sale, you may both be entitled to an exclusion.
  • Generally, fees incurred for the production of income, such as obtaining spousal support or alimony, are deductible. IRC 212 fees for tax advice are also deductible. Fees incurred defending against paying alimony are not deductible. If your spouse pays your fees, you may not take the deduction.
  • A person qualifies as head of the household for income tax purposes if he or she provides more than half the costs of a home for him or herself and a child or other dependent.

See also Tips for Recently Married or Divorced Taxpayers and Publication 504 -- Divorced or Separated Individuals  on the IRS.gov website.

The attorneys at Hoge Partners, PLLC would be happy to talk to you about your concerns in the area of determining and proving the parties' respective incomes.