To kick off our multi-part series on Colorado’s new law on spousal maintenance (alimony), we first started with a general overview of the guideline formulas in C.R.S. 14-10-114. Next, we considered when a spouse going through a divorce is eligible for maintenance under the “threshold test.” Now we turn to “income,” a benign term that on its face appears to be relatively simple. As detailed below, determining income for a party in a Colorado divorce can be complicated.
Before the recent amendments to Colorado’s law on maintenance, C.R.S. 14-10-114, it was unclear how a court should determine income for cases where long-term, i.e. permanent, maintenance was requested or the parties annually made $75,000 in total. Colorado divorce attorneys relied on inferences in the maintenance statute to the more specific definition of income for child support and cases such as In re Marriage of Swing. And even relying on the definition of income for child support proved to be problematic when a party was self-employed or was part of a partnership or close-held corporation.
Fortunately, however, the General Assembly clarified what exactly is “income” in determining both maintenance and child support in Colorado. Starting on January 1, 2014, the amount of income that is used in the Child Support Worksheet or Maintenance Guidelines is the same.
The first concept that must be understood is the difference between gross and net income. Gross income is before taxes and deductions like health insurance or 401(k) contributions are taken out. Net income is the money left after taxes and deductions; the amount a salaried employee gets if they do direct deposit. In Colorado, gross income is what matters for maintenance and child support.
“Gross income” includes the following:
- Income from salaries
- Tips declared to the IRS or imputed by the court
- Payments received as an independent contractor
- Dividends, capital gains, trust distributions, annuity payments and interest
- Social security, workers comp, and disability benefits
- Gifts, including from family members
- Expense reimbursements or in-kind benefits such as free housing, food, transportation, etc.
- Moneys drawn by a self-employed individual for personal use that are deducted as a business expense
The above is not an exhaustive list. And income does not include child support payments received, or money received from additional jobs or work beyond 40 hours per week.
Things get tricky when a party is self-employed or involved in a partnership or closely-held business. Generally, income for someone self-employed or an owner of a small business is calculated by taking the gross receipts/revenue and subtracting “ordinary and necessary expenses.” That last term is where parties frequently disagree on whether an expense is a legitimate business deduction. The debate doesn’t end with a cursory review of a tax return.
People frequently run much of their personal expenses through their business because the risk of an audit by the IRS is somewhere in the neighborhood of 1%. For example, a self-employed project manager may deduct his entire monthly cell phone bill or gas expenses even though he undoubtedly uses his cell phone for personal use, or drives up to Aspen on a weekend to ski. He may not get caught by the IRS, but a competent Colorado divorce lawyer will successfully argue that his income is higher for analyzing maintenance and child support.
Finally, the amendments to Colorado law clarify how income is determined for a “silent partner” or someone that owns part of a business, but isn’t a manager. In that scenario, income for maintenance and child-support purposes may be limited to actual cash distributions. That income may be lower than merely taking the gross revenue of the company and reducing by ordinary business expenses.
We’ll continue our discussion on Colorado maintenance (alimony) and child support by examining voluntary unemployment or underemployment.