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Imputed Income

If judge says, “Impute $25,000 of income,” how should I treat that income for tax purposes — as pre-tax or after-tax?

Ultimately, it comes down to the imputation of income – was it intended to be gross or net? While it is true the party with imputed income will not be paying taxes on that imputed income, unless the imputation was intended to be of net income it would not be fair to impute as such.

There are three places in the software you can put imputed income and there are different tax consequences for each one:

  • Client Info tab>Support/Maint Data page>Wage-Like Income section>#2 (scroll down to #2 – Potential Income. Entering the imputed income amount here adds it without any taxes, so gross=net for this purpose.
  • Client Info tab>Support/Maint Data page>Wage-Like Income section>in the blank lines you can add the imputed income. When I use this method of data entry, I like to actually call it Imputed Income. Entering Income here will have the income subject to Federal and State income tax, but not FICA or Medicare (unless you mark it (x) as Non-Taxable, then it will have no taxes taken out at all.
  • Client Info tab>Support/Maint Data page>Wages and Filing Status section. I would click More Info for that party’s wages and enter the Employer as “Imputed Income” so it shows up that way in reports like the Budget Report. This method will have the imputed wages subject to FIT, SIT, FICA and Medicare. I actually think this is the most appropriate way to handle these kind of Judge recommendations most of the time.

It could be that the recipient’s income after taxes is actually higher than the imputed income before taxes. Wow! This is because of the tax credits – the earned income credit as well as the child tax credits. This is reflected in the negative numbers for taxes.

You can suppress the tax credits by going to the Reports tab>View/Edit Taxes page, and override the tax credit amounts with $0 for both the EITC and the Child Tax credits.

The idea of imputed income is that the maintenance recipient could be employed and earn a certain amount of income. If that litigant does go out and obtain a job making that income, then certainly the income would be taxed and their net would be less than the gross. Interestingly, with the tax credits, that net could actually be more than the amount the Judge intended.

There is no simple yes/no answer to your question, but this discussion may illuminate the possibilities.

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