Accurate Net Income

In marriage dissolution cases, the alimony and child support you calculate depend on the parties’ net incomes. “Net income” Seems like a simple concept. But sometimes it is not so simple to figure out the amount of money that is actually available to spend.

Often during divorce, the client who will be required to pay alimony or child support gives their attorney a Wage and Tax Statement, also known as the IRS Form W-2, which they receive from an employer. (Employers are required to send a Form W-2 to every employee, and it reports the client’s wages for the year and the amount of taxes withheld from their paychecks.)

Some practitioners think that the wage and tax-withheld numbers from the W-2 give them all they need to accurately calculate net income. But in fact, those numbers are not enough.

Here’s why:

The wage shown does not include other income a party may have. It does not show income from side gigs, or consulting engagements. And it does not include tips. It also does not include government benefits or investment income, such as income from from stock investments, and high-yield savings accounts.

So the wage number is not enough. And the tax withheld number is not enough either. The tax withheld is not the actual tax due. The tax withheld could have been too much (refund due) or too little (further payment due).

Also, the tax withheld as shown on the W-2 will be last year’s tax, based on last year’s income. This year’s income is a whole new ballgame. Not only are incomes likely to be different, but the tax laws, rates and brackets change every year.

So, what is the solution?

Because the task is to apply complex laws and perform complex calculations, it’s no surprise that a variety of online tools are available. These tools allow family law attorneys to plug in all the client’s relevant details to get the desired tax and net income totals.

Some of these tools are free — but beware.

Many of these free online calculators exist mainly to generate traffic to a website that promotes other services, and often they not kept up to date with changing tax laws. They are also vulnerable to user error, such as entering the wrong figures and information as discussed earlier in this post.

The only other “free” option for professionals is the painstaking and time-consuming process of researching the latest IRS and state tax guidelines and manually performing all the necessary calculations. That can not be a good use of anyone’s time.

So what to do?

A better option is to use our Family Law Software to determine the most accurate “net income” possible. With our advanced tools, you’ll be able to start with gross income, accurately calculate final taxes, and apply statutory deductions for both parties. You will get the right results, taking account of all income and deductions, for the current year.

This will empower your clients to make educated decisions and allow you to finalize cases quickly and confidently.

2 replies on “Accurate Net Income”

This also applies to wages, taxes and deductions shown on Paystubs or Pay Statements. Like W-2’s, they don’t present a full picture of all sources of income and may show artificially low or high taxes since employees can manipulate the number of Withholding Allowances simply by submitting an Updated W-4 form. The Family Law Software 1040 computation is continually updated to comply with current tax law and includes all sources of income entered into a case, compares Standard & Itemized Deductions, Refundable and Non-Refundale Tax Credits and much more, ensuring a complete view of Income and Taxes.

Good post, Dan. Those free online calculators don’t include all the relevant factors. When combined with user error, the results are inaccurate. That’s why I use Family Law Software.

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