The term imputed income refers to the treatment of an individual’s income as if it is greater than what he is actually earning. While income may be imputed for a variety of purposes, from taxation to healthcare, it is most commonly used in reference to the determination of child or spousal support in family law matters. For example, if the court, when calculating child support payments, finds that one parent is unemployed, or underemployed, earning less than he or she is capable, it may assign, or “impute,” a minimum level of income to that parent.
This is done to encourage the parent to seek suitable employment, and to deter parents from intentionally reducing his or her income to avoid making child support payments. To explore this concept, consider the following imputed income definition.
Definition of Imputed Income
- An income level assigned to an individual that is greater than the individual’s actual earnings.
What is Imputed Income in Family Law
In the United States, an unfortunate occurrence in family law is for one spouse to either under report his earnings, or to actually stop working in order to avoid making child or spousal support payments. In other situations, one spouse, often the one who gave up a career to care for the family, is either unemployed, or is simply not earning to his potential.
When the court imputes income, it treats that spouse’s income as if it is what he is capable of earning, rather than what he is actually earning. In many jurisdictions, an imputed income consistent with working full time at minimum wage will be assigned to such an individual. In the case of a previously high-earner who has reduced his employment in order to avoid support payments, the court may impute an amount equal to the difference in wages.
Determination of Imputed Income in Child Support
The court’s ability to fairly determine child support is dependent on an accurate representation of both parents’ incomes. If the court sees that one parent is voluntarily, and without a good reason, underemployed or unemployed, it may impute income to that parent, based on certain guidelines, which vary by state. Factors commonly used to decide whether income should be imputed may include:
- The reason for the parent’s unemployment or underemployment
- The employment and earning status the parent would have had if the family had remained intact
- Other available assets that may help support each parent
- The ages of the children, and need for the parent to provide child care
Acceptable Reasons for Unemployment or Underemployment
In considering why a parent is unemployed or underemployed, the loss of a job for certain reasons is considered to be legitimate. These include layoff because the company downsized, the inability of a parent to find a new job through diligent effort, the parent’s income relies on commissions while sales have been slow due to the economy, or the parent’s inability to maintain a work schedule due to child care responsibilities. In such a case, the judge may decide to impute very little or no income to the parent.
Proving a Parent is Intentionally Unemployed or Underemployed
In some situations, one parent believes the other is intentionally avoiding the responsibility of helping to support the children. Situations for which the court is likely to impute income to a parent include:
- A skilled, highly-paid parent quits his job after the couple separates, and takes a lower paying job or volunteer position
- A parent delays the receipt of a substantial commission or pay bonus
- A parent turns down overtime or a promotion without a good reason
It may be necessary to prove to the court that these conditions exist. The other parent may provide written documentation to show that the unemployed parent quit his job voluntarily, or that he has been turning down overtime he normally would have accepted before the separation. Other evidence that may show the parent is acting in bad faith may include social media posts made by that parent, though it is important to know what evidence is admissible in court. This may vary by state, so obtaining the advice of an attorney is a good idea.
How Imputed Income is Calculated
In deciding how much income should be imputed to an unemployed or underemployed parent, the court generally takes into consideration certain factors, including:
- Earning Capacity – The amount the parent is capable of earning based on his work history, occupational skills and qualifications, educational background, previous earnings, and available job opportunities
- Most Recent Wage – Written documentation of the parent’s most recent wage or benefits
- Minimum Wage – If the court cannot determine the parent’s earning capacity, and there is no official record of recent wages, the court may impute income based on full time employment at current minimum wage
Imputed Income and the IRS
In many situations, benefits an individual receives, such as from employment, do not increase the balance of their bank account, but are counted as income for tax purposes. To help reduce the likelihood of employees being hit for taxes higher than their actual income levels account for, some employers add imputed income to each pay stub. This action is known as “grossing up” the employees’ salaries. This may occur when employees are commonly awarded perks or bonuses that must ultimately be reported to the IRS and taxed, in order to ensure the proper amount of income and employment taxes are withheld from the employees’ wages. Imputed income may also be used to offset the tax burden of domestic partner benefits.
Imputed income must be reported by the employer on IRS form W-2, as it is subject to FICA withholding. Generally, however, an employee may choose to have income tax withheld on imputed income each pay period, or to pay what is due at the time he files his federal income taxes.
Imputed Income for Employer-Provided Life Insurance
Life insurance is a benefit commonly offered by employers. When an individual’s premium for life insurance is deducted from his pay before taxes, the IRS considers the insurance to be “employer provided.” Employees receiving such a benefit are required to list the value of the insurance policy over a certain amount as imputed income.
Imputed Income and Obamacare
The Affordable Care Act, also known as “Obamacare,” was instituted to expand the availability of affordable, quality healthcare to all Americans. Under the Act, employer provided healthcare plans are to be extended to employees’ qualifying children through the age of 26. This brought about a change to the rules of imputed income, as previously the value of such coverage was considered taxable income. The Affordable Care Act amended the federal tax code to exclude the value of such coverage, no longer requiring it to be listed as imputed income, as long as the employee’s eligible child has not yet turned 27 as of the end of the year.