Chapter 2: Determining Income

The first step in figuring each parent’s support obligation is to determine both parents’ individual incomes.

2.01​Income

2.01(A)​The term “net income” means all income minus the deductions and adjustments permitted by this manual. A parent’s “net income” used to calculate support will not be the same as that person’s take home pay, net taxable income, or similar terms that describe income for other purposes.

2.01(B)​The objective of determining net income is to establish, as accurately as possible, how much money a parent should have available for support. All relevant aspects of a parent’s financial status are open for consideration when determining support.

2.01(C)​Income includes, but is not limited to, the following:

(1)​Wages, overtime pay, commissions, bonuses, or other monies from all employers or as a result of any employment (usually, as reported in the Medicare, wages, and tips section of the parent’s W-2).

(2)​Earnings generated from a business, partnership, contract, self-employment, or other similar arrangement, or from rentals. §2.01(E)

(a)​Income (or losses) from a corporation should be carefully examined to determine the extent to which they were historically passed on to the parent or used merely as a tax strategy.

(3)​Distributed profits or payments from profit-sharing, a pension or retirement, an insurance contract, an annuity, trust fund, deferred compensation, retirement account, social security, unemployment compensation, supplemental unemployment benefits, disability insurance or benefits, or worker’s compensation.

(a)​Consider insurance or other similar payments received as compensation for lost earnings, but do not count payments that compensate for actual medical bills or for property loss or damage.

(b)​If a retired parent receives payments from an IRA, defined contribution, or deferred compensation plan, income does not include contributions to that account that were previously considered as the parent’s income used to calculate an earlier child support obligation for a child in this case.

(4)​Military specialty pay, allowance for quarters and rations, housing, veterans’ administration benefits, G.I. benefits (other than education allotment), or drill pay.

(a)​If the servicemember receives housing pay and supports another home (i.e., second residence), housing pay is not considered income to the individual.

(5)​Tips, gratuities, royalties, interest, dividends, fees, or gambling or lottery winnings to the extent that they represent regular income or may be used to generate regular income.

(6)​Net capital gains are included as income. When attributable to a single event or year, or when cash may not be immediately available to the parent, consider them to the extent they can be used to represent income over several years. To the extent that a party proves that a portion of the capital gain was considered in the property division of the judgment of divorce between the parties, that portion should not be included as income.

(7)​The standard (basic needs) portion of adoption subsidies for children in the case under consideration (do not consider the medical needs and intensive rate portion of the subsidy, nor the family support subsidy as income).

(8)​Any money or income due or owed by another individual, source of income, government, or other legal entity. Income considered should usually meet the statutory definition found at MCL 552.602(o).

2.01(D)​Income also includes the market value of perquisites (perks) received as goods, services, or other noncash benefit for which the parent did not pay, if they reduce personal expenses, and have significant value or are received regularly.

(1)​Common forms of perquisites (perks) or goods and services received in-kind include, but are not limited to: housing, meals, or room and board, personal use of a company business vehicle or mileage reimbursement, including use between home and primary worksite, and other goods or services.

(2)​Perquisites (perks) do not include money paid by an employer for benefits like tuition reimbursement, educational cost reimbursement, uniforms, and health savings account (HSA) contributions.

2.01(E)​Self-Employed Individuals, Business Owners, Executives, and Others

(1)​Difficulty in determining income for self-employed individuals, business owners, and others occurs for several reasons.

(a)​These individuals often have types of income and expenses not frequently encountered when determining income for most people.

(b)​Taxation rules, business records, and forms associated with business ownership and self-employment differ from those that apply to individuals employed by others. Common business documents reflect policies unrelated to an obligation to support one’s child.

(c)​Due to the control that business owners or executives exercise over the form and manner of their compensation, a parent, or a parent with the cooperation of a business owner or executive, may be able to arrange compensation to reduce the amount visible to others looking for common forms of income.

(2)​In order to determine the monies that a parent has available for support, it may be necessary to examine business tax returns, balance sheets, accounting or banking records, and other business documents to identify any additional monies a parent has available for support that were not included as personal income.

(3)​Whether organized informally, or as a corporation, a partnership, a sole proprietorship, or any other arrangement, these considerations apply to all forms of self-employment and business ownership, as well as to business executives and others who may receive similar forms of compensation.

(4)​For purposes of this subsection, income includes amounts that were not otherwise included as income elsewhere in this chapter. Pay special attention to the following forms of compensation:

(a)​Distributed profits, profit sharing, officers’ fees and other compensation, management or consulting fees, commissions, and bonuses.

(b)​In-kind income or perquisites (§2.01(D)), gifts, free admission to entertainment, or personal use of business property. (Determine the value based on a fair market price, i.e., the price a person not affiliated with the business would pay).

(c)​Redirected income, or amounts treated by the business or company as if the redirected amounts were something other than the parent’s income. Amounts include, but are not limited to:

(i)​Personal loans. Presume personal loans from a business are in fact redirected income, unless all the following are true: (1) the parent signed a contract or promissory note outlining the terms of the loan, (2) the business maintains records showing the loan owed as a receivable, (3) the parent makes installment payments and the present loan is paid current, and (4) the interest earned and repayment rate appear to be a reasonable business practice. Unless the presumption is overcome, a parent’s income includes the difference between the amount the parent repays and a repayment amount for a similar commercially available unsecured personal loan.

(ii)​Payments made to friends or relatives of the parent. If the business cannot demonstrate that the payments are equivalent to a fair market value payment for the work or services the friend or relative actually performs, include any amount that exceeds the fair market value as the parent’s income.

(d)​Reduced or deferred income. Because a parent’s compensation can be rearranged to hide income, determine whether unnecessary reductions in salaries, fees, or distributed profits have occurred by comparing amounts and rates to historical patterns.

(i)​If a party owns a company where part of the annual profits have not been distributed and have been retained by the company, that part of the profits should be included in the party's income unless the party can show that the retained earnings are essential for the operation of the company.

(ii)​Unless a business can demonstrate legitimate reasons for reductions (as a percentage of gross business income) in salaries, bonuses, management fees, or other amounts paid to a parent, use a three-year average to determine the amount to include as a parent’s income.

(e)​Deductions for Tax Purposes. For a variety of historical and policy reasons, the government allows considerable deductions for business-related expenses before taxes are calculated. Those same considerations are not always relevant to monies a parent should have available for child support. Therefore, some deductions should be added back into a parent’s income for purposes of determining child support, including:

(i)​Rent paid by the business to the parent, if it is not counted as income on that parent’s personal tax return.

(ii)​Real estate depreciation should always be added back into a parent’s income when calculating support.

(iii)​Depreciation on home offices and personal vehicles should be added back into a parent’s income. Accelerated depreciation shall be added back to a parent’s income; however, upon proof, the court may allow as a deduction from a parent’s income the lesser of actual expenses incurred or the straightline amount.

(iv)​Home office expenses, including rent, hazard insurance, utilities, repairs, and maintenance.

(v)​Entertainment expenses spent by the parent. Legitimate expenses for customer’s entertainment are allowable as deductions.

(vi)​Travel expense reimbursements, except where such expenses are inherent in the nature of the business or occupation (e.g., a traveling salesperson), and do not exceed the standard rates allowed by the state of Michigan for employee travel.

(vii)​Personal automobile repair and maintenance expenses.

2.01(F)​Alimony and Spousal Support

(1)​Income includes alimony/spousal support paid by someone who is not the other parent in the case under consideration.

(2)​Alimony/spousal support paid between the parents in the case under consideration does not get deducted from its payer’s income.

2.01(G)​Potential Income

When a parent is voluntarily unemployed or underemployed, or has an unexercised ability to earn, income includes the potential income that parent could earn, subject to that parent’s actual ability. Generally, do not consider incarceration as voluntary unemployment.

(1)​The amount of potential income imputed should be sufficient to bring that parent’s income up to the level it would have been if the parent had not reduced or waived income.

(a)​The amount of potential income imputed (1) should not exceed the level it would have been if there was no reduction in income, (2) not be based on more than a 40 hour work week, and (3) not include potential overtime or shift premiums.

(b)​Imputation is not appropriate where an individual is employed full time (35 hours per week or more, but has chosen to cease working additional hours (such as leaving a second job or refusing overtime). Actual earnings for overtime, second job, and shift premiums are considered income. §2.01(C)(1).

(2)​ Use relevant factors both to determine whether the parent in question has an actual ability to earn and a reasonable likelihood of earning the potential income. To figure the amount of potential income that parent could earn, consider the following when imputing an income:

(a)​Prior employment experience and history, including earnings history, and reasons for any termination or changes in employment.

(b)​Educational level, literacy, and any special skills or training.

(c)​Physical and mental disabilities that may affect a parent’s ability to work, or to obtain or maintain gainful employment.

(d)​Availability for work (exclude periods when a parent could not work or seek work, e.g., hospitalization, incarceration, debilitating illness, etc.).

(e)​Availability of opportunities to work in the local geographical area.

(f)​The prevailing wage rates and number of hours of available work in the local geographical area.

(g)​Diligence exercised in seeking appropriate employment.

(h)​Evidence that the parent in question is able to earn the imputed income.

(i)​Personal history, including present marital status, age, health, residence, means of support, criminal record, ability to drive, and access to transportation, etc.

(j)​The presence of the parties’ children in the parent's home and its impact on that parent’s earnings.

(k)​Whether there has been a significant reduction in income compared to the period that preceded the filing of the initial complaint or the motion for modification.

(3)​Imputation of potential income may account for the additional costs associated with earning the potential income such as child care for the children in common with the other parent and taxes that a parent would pay on the imputed income.

(4)​Imputing an income to a parent to determine a support obligation by using any of the following violates case law and does not comply with this section. See: Ghidotti v. Barber, 459 Mich 189; 586 NW2d 883 (1998) and Stallworth v Stallworth, 275 Mich App 282 (2007).

(a)​Inferring based on generalized assumptions that parents should be earning an income based on a standardized calculation (such as minimum wage and full time employment, median income, etc.), rather than an individual’s actual ability and likelihood.

(b)​Absent any information or indication concerning a parent’s ability, assuming that an individual has an unexercised ability to earn an income.

(c)​Failing to articulate information about how each factor in §2.01(G)(2) applies to a parent having the actual ability and a reasonable likelihood of earning the imputed potential income, or failing to state that a specific factor does not apply.

(d)​Inferring that commission of a crime is voluntary unemployment, without evidence that the parent committed the crime with the intent to reduce income or to avoid paying support.

(5)​The court makes the final determination whether imputing a potential income is appropriate in a particular case.

2.01(H)​Interest earned or potentially earned on inheritances and gifts (§2.05(B)) should be considered as income. Impute a reasonable rate when determining the potential investment return that could be earned.

2.01(I)​Except as provided in §2.01(K), attribute all dependent benefits from government insurance programs that are based on the earnings record of a parent and paid for the children-in-common as the earning parent’s income. Benefits include amounts paid from insurance programs like social security, veteran’s administration, or railroad retirement.

2.01(J)​Custodial parent income includes all retirement, survivors, or disability dependent benefits from government insurance programs like social security, veteran’s administration, or railroad retirement that are received for the children-in-common based on the earnings record of someone other than a parent.

2.01(K)​When a parent receives retirement, survivors, or disability benefits from a government insurance program like social security, veteran’s administration, or railroad retirement and the children-in-common qualify to receive dependent benefits based on multiple adults’ earnings records and a party provides sufficient documentation to distinguish on whose behalf amounts are paid, attribute the children’s benefits as income between the parents as follows:

(1)​Because dependent benefits are paid based on the adult’s earnings record that results in the highest benefit for the children, include the amount of dependent benefits for the children-in-common that would be attributable to the support payer’s earnings record as that parent’s income because it is credited against the payer’s obligation under §3.07 .

(2)​If the children-in-common’s remaining benefits are paid based on the other parent’s earnings record, include any benefit amounts that exceed amounts considered as the support payer’s income under this subsection as the other parent’s income.

2.01(L)​Do not consider any monies (e.g., social security or other similar dependent benefits, child support, etc.) that a parent receives for the care of additional children not in common with the other parent in this case, nor any dependent benefits paid on a parent’s behalf for those children.

2.01(M)​Income includes reimbursements (including per diem) from an employer for travel or other expenses that exceed actual costs incurred.

(1)​Absent documentation or other proof of the parent’s actual costs, presume that the costs incurred were at the standard rates allowed by the state of Michigan for employee travel (including per diem and mileage).

2.02​Seasonal and Annual Variation

2.02(A)​Where monthly income varies due to seasonal factors (e.g., overtime, second jobs, bonuses, or profit sharing) calculate income using information from at least the preceding twelve months.

2.02(B)​Where income varies considerably year-to-year due to the nature of the parent’s work, use three years’ information to determine that parent’s income.

2.02(C)​Evidence showing that overtime, second job, or other types of income will vary in the future may be considered.

2.03​Children’s Income

2.03(A)​A child’s income should not ordinarily be considered in calculating child support.

2.03(B)​A child’s Supplemental Security Income (SSI) benefits cannot be considered as income, nor used to reduce a parent’s support obligation.

2.04​Means Tested Income

2.04(A)​Income does not include the value of benefits from means tested sources such as Temporary Assistance to Needy Families (TANF), food stamps, the federal Earned Income Credit, and Supplemental Security Income (SSI).

2.05​Inheritances and Gifts

2.05(A)​Income generally does not include property or principal from an inheritance or one-time gift.

2.05(B)​Income includes the interest, as well as potential interest (§2.01(H)), earned on inherited property, and gifts.

2.05(C)​Income may include the value of gifts or gratuities such as money, food, shelter, transportation, or other goods or services that a parent receives from relatives (other than a spouse), friends, or others, to the extent it:

(1)​Is significant and regularly reduces personal expenses; or

(2)​Replaces or supplements employment income.

2.06​Low Income Producing Assets

2.06(A)​To the extent a parent’s assets could be (but are not) used to generate regular income, a parent’s income includes an imputed reasonable and regular investment return on those assets, except a home and its reasonable furnishings, an automobile, and other small items of personal property.

2.07​Allowable Deductions from Income

2.07(A)​Alimony/Spousal Support

(1)​Deduct alimony/spousal support paid to someone other than the other parent in the case under consideration from its payer’s income after deducting federal, state, and local income taxes, and deducting other mandatory federal taxes (e.g., FICA).

(2)​Alimony/spousal support paid between the parents in the case under consideration is not included as its recipient’s income but remains its payer’s income.

2.07(B)​Income and FICA/Medicare Taxes

(1)​Deduct a parent’s actual income taxes from income.

(2)​If tax returns are not made available, taxes should be estimated based on the best available information and the estimation procedures described below.

(3)​In the absence of an explicit written agreement or order to the contrary, presume that the person with whom the child resides for the majority of a calendar year claims the dependent tax exemption for that child.

(a)​In determining filing status (single or married), presume the status most consistent with each parent’s situation.

(b)​Use income tax guides to determine the taxes deducted from gross earnings for a parent’s actual number of dependent exemptions.

(c)​To the extent possible, estimate taxes at rates that the parent would likely pay for the income types attributed to that parent.

2.07(C)​Deduct any mandatory payments as a condition of employment (e.g., required union dues and nondiscretionary retirement contributions).

2.07(D)​Deduct life insurance policy premiums when children-in-common with the other parent are the beneficiaries.

(1)​Only deduct term life insurance premiums paid on coverage ordered by the court.

(2)​With whole life insurance policies that provide coverage ordered by the court, only deduct an amount equivalent to the cost of the same amount of term life insurance.

2.07(E)​Deduct the cost of care or services paid by a parent to comply with case service or permanency plan requirements in child protective or juvenile delinquency proceedings.

2.07(F)​Deduct a parent’s net actual cost of providing mandatory health care coverage for himself or herself. Calculate this deduction by figuring the net health care premiums [costs minus any reimbursements, subsidies, or credits] paid by the parent and dividing by the number of individuals covered (including the parent).

2.07(G)​Do not include employer reimbursements for the actual costs incurred for travel (subject to §2.01(M)), tuition, educational costs, and uniforms as income.

2.07(H)​Deduct recurring payments made for restitution, fines, fees, or costs associated with that parent’s conviction or incarceration for a crime other than those related to failing to support children, or a crime against a child in the current case or that child’s sibling, other parent, or custodian.

2.08​Additional Children from Other Relationships

2.08(A)​Additional (biological or adopted) minor children include:

(1)​Those from a relationship with someone other than the other parent in the case under consideration.

(2)​Those in common with the other parent in this case who live in a nonparent’s custody, when determining support for children living with either parent.

(3)​Those in common with the other parent in this case who live with either parent, when determining support for other children-in-common who live in a nonparent’s custody.

2.08(B)​When a parent has additional minor children, net income for calculating support in the present case does not include monies for children not in common with the other parent in the case under consideration (§2.01(L)), nor the portion of that parent’s income reserved for supporting additional children calculated according to both of the following steps:

(1)​Deduct from a parent’s income dollar-for-dollar the portion of that parent’s health insurance premiums used to cover qualifying additional children. Calculate the premium deduction by dividing the premium by the number of individuals covered (including the parent) and multiply by the number of qualifying additional children covered.

(2)​After subtracting qualifying additional children’s health care coverage costs, multiply that parent’s remaining net income by the Additional Children table’s Adjustment Multiplier to determine net income to use for the present case.

2.09​Low Income Threshold and Family Net Income

2.09(A)​“Low Income Threshold” is the individual income level specified in the current supplement to this manual.

2.09(B)​When one parent’s net income does not exceed the Low Income Threshold, do not include that parent’s income in the monthly net family income used to calculate the other parent’s general care support obligation. §3.02(B)