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The Florida Bar Journal
July/August, 2006 Volume 80, No.7
Mathematics for Imputing Income

by Jerry Reiss and Michael R. Walsh

Page 64

A number of factors determine entitlement to permanent periodic alimony. The factors include the length of the marriage; the age and health of both spouses; the education of both spouses; and the financial resources of each party.1 Once entitlement has been established, the amount of alimony that a court may award is calculated with one simple equation involving two parameters: the needs of the party seeking alimony and the ability of the other party to pay alimony.2 While the equation determining the alimony award appears easy, the factors that determine the ability to pay and the need for alimony are not.

Imputing Income:
When and Why
Each factor that defines or limits the need for, and the ability to pay, alimony can be thought of as an equation with two variables. One of these variables is used in defining the availability of income, or alternatively, in limiting the amount of alimony that may be paid. The second variable represents that which is defined or which limits each of the established parameters. At the end of the process, at least a dozen or more simultaneous equations exist that must be solved in order to identify the correct alimony amount. This is made possible because there is a total of one less variable than equations to solve. While the process introduces complications, these complications can be dealt with and variables solved without much error.
Trial courts, however, generally use a less precise approach. The approach of the courts works well most of the time, but it fails miserably when it must deal with one or both spouses’ manipulation of income. This article examines the improper imputation of income and its effect on alimony awards.

Imputing Income to Correct Unemployment or Underemployment
In order to be eligible for imputed income, competent evidence must support a finding that the unemployment or underemployment is intentional.3 When imputing income, the amount of income is inextricably tied to what can be achieved in the long-term.4 The same parameters that apply to imputing income to an asset apply to both unemployment and underemployment. Note, however, that imputed income must be based upon all current circumstances.5 Before imputing income as a replacement, there must be competent evidence to support a court finding that a job with that income is currently available and that it is reasonable that a comparable job can be found in the short-term.6 Otherwise, only extra income that satisfies these requirements may be imputed.7
A party may manipulate his or her income through unemployment, underemployment, or the lack of best efforts in investing to produce income. Sometimes, however, the manipulation of income is corrected through the backdoor approach, especially where there has been an intentional dissipation of marital assets. Also, trial courts routinely impute income to a mischievous spouse to correct the intentional manipulation of income. Imputation of income in this situation is where the greatest errors occur. In part, these errors are due to a lack of standardization in the treatment of various forms of income. It is also due to a lack of understanding on how imputing income actually affects the result. Further compounding judicial error, many times the trial court does not understand the process for determining the amount of income to be imputed.
Courts often erroneously impute income when manipulation of income is possible, but has not been demonstrated.8 Moreover, the type and amount of income that courts impute is often overstated. An overstatement of the amount of income can be overcome when the spouse obligated to pay alimony experiences good fortune following the cutoff date,9 but it is also devastating to that spouse when he or she does not experience good fortune! The reason for this is because the valuation procedures define the measurement process. They also, however, limit the extent of the need for alimony and available income to meet that need to the present circumstances.10 Thus, if the need for alimony is understated, it can be corrected in a modification action, but when the ability to pay alimony is overstated, the damage is irreversible. The alimony award is then inflated, used to meet a party’s need for alimony, and may lead to the undesirable outcome that wealth is redistributed with alimony payments. This result occurs most often when different definitions of income apply to each party and when each party’s right to preserve assets11 depends upon the varying definitions used to apply to income.
For example, redistribution of wealth occurs when one party’s income producing asset is a mortgage receivable or an annuity and the other party’s main asset is a house awarded in equitable distribution. The definition invariably applicable to the owner of the mortgage or annuity is the liquidation value of that asset. Conversely, the definition applicable to the owner of the marital home is the preservation of the entire asset with the appreciation intact. These differing definitions of income can often lead to different results when a request to preserve an asset is made. Adding further confusion, trial courts fail to understand when differing definitions of income are at work because the trial court confuses an income stream with actual income. The former can be pure liquidation of an asset, whereas the latter does not at all affect principal. In the example furnished above, there is no income assigned to the house, which is why that spouse’s assets increase. As a result, the alimony award is then used partly to help that spouse accumulate more assets, contrary to Mallard v. Mallard, 771 So. 2d 1138 (Fla. 2000).

Lifestyle Need Cannot Include the Full Mortgage Payment
The extent of the savings component associated with the marital home is exacerbated when the need component of the mortgage payment fails to separate and exclude the principal payment. The value of the house can increase in only two ways: active or passive appreciation. If the value of a home increases due to passive appreciation, that increase is solely the result of market forces on the home over time. If the increase in the home’s value is actively funded with alimony, the alimony creates more assets and once again violates Mallard. The value of the marital home on the cutoff date is the difference between the market value of the asset and the outstanding mortgage. A decrease in the outstanding mortgage has nothing to do with market conditions. Therefore, this creates extra property that was not available on the cutoff date. When the court fails to impute income to the marital home at the same time that it uses or imputes income to the other spouse’s asset(s) awarded in lieu of the marital home, this produces a redistribution of assets funded with an alimony component. When alimony funds the full mortgage payment, by failing to deduct it from lifestyle need, the principal portion of the payment, more assets are created by the use of alimony. Typically, both occur and a redistribution of wealth occurs rapidly.
Before discussing how and when it is improper to impute income, some foundational relationships must be developed. First, the percentage that the alimony award bears to available income often depends on the very same factors used to establish entitlement to an alimony award, whereas, other factors determine the maximum amount of alimony that may be paid. The amount of income the party seeking alimony should receive from all of his or her assets is included in this process.12 The process also includes income from employment, which works to lessen the amount of an unmet need for alimony. The determination of the amount of alimony is also made after the assets have already been divided in equitable distribution.13 Other forms of income the party seeking alimony receives limits the amount of the alimony payment.14 These other forms of income may include the amount paid for temporary or rehabilitative alimony.15
Each party’s assets are directly related to the amount of income that the asset can produce. Other forms of support may affect a spouse’s need for alimony. The award of support and property are interrelated in accomplishing a specific trial court objective. The trial court is then free to fashion an award that considers the facts of each case, and then award income and assets as part of one overall scheme.16 The standard for reviewing whether a trial court abused its discretion in making the award is based on the entire award instead of each piece of it.17

Measuring the Marital Standard of Need
The needs of each spouse are not only limited to those enjoyed during the final years before the dissolution.18 Further, a generalized need established during the marriage must support any specific need that a party proposes. For example, if 10 percent of the parties’ marital income was spent on insurance (“the generalized need”), the specific need for insurance is limited to 10 percent of the marital income. It is not limited to the type of insurance that was purchased during the marriage because needs can change through time. This is especially true when the parties dissolve their marriage. Entertainment can be another category of generalized needs and includes theatre, renting movies, eating in restaurants, and even vacations.
Another limitation on a party’s need for alimony is that it cannot be based upon a savings component. This moves away from the statutory purpose of alimony.19 This “need basis” violates the statutory definition for awarding property under equitable distribution.20 The limitation that need cannot include a savings component is often breached when income is imputed to the party paying alimony for the wrong reason or when income that should be excluded from alimony consideration is not subtracted. It was shown earlier that this limitation is routinely breached when the husband retains his pension in exchange for the wife receiving the marital home.

Often Wrong to Impute Contribution to 401(k) as Income
Next, imagine the combined effect of imputing income to the party paying alimony for the wrong reason, instead of excluding the same amount of income. This occurs when a court is confronted with an ongoing 401(k) plan and fails to exclude the plan’s income from the equitably divided share (more fully explored later in this article). The contributions that are made to a 401(k) after the cutoff date are too often imputed to those paying alimony when determining their ability to pay alimony.
In most married households, the combined income of both spouses is barely sufficient to support each spouse individually. When a married couple’s combined income is required to support two households upon divorce, both parties suffer a reduction in lifestyle.21 As such, the 401(k) contributions made during the marriage represent surplus income. When the contributions are imputed as income to demonstrate an ability to pay alimony, they then form the top layer of income actually used to pay alimony. When the spouse paying alimony continues the contributions after the marriage ends, that spouse must lower his or her lifestyle even more. This produces the absurd result that the spouse paying alimony supports the other spouse at a higher lifestyle than either experienced during the marriage. But when the spouse paying alimony converts this income at retirement to an income stream, the same income imputed and used to pay support while working is once again used to pay alimony at retirement. Retirement forces most people to further reduce their standard lifestyle and the result is pure “double dipping” into the future income stream to pay alimony.
When the spouse paying alimony divided the marital share of the 401(k) benefit by offsetting it with the marital home, the second half of the 401(k), converted to an income stream at retirement, is used to pay the alimony later during retirement years.22 Consequently, the alimony recipient receives a full double bite of both portions of the 401(k) benefit, especially when the income at retirement is converted to an annuity payout. Effectively, the spouse paying alimony receives little to none of the entire 401(k) benefit. This is incongruous when one considers that the party paying alimony voluntarily lowered his or her lifestyle and supported the other spouse at a higher lifestyle in order to have some comfort in retirement years.

Measuring the Realized
Rate of Return on Equities
The greatest harm results from imputing income to assets otherwise thought to be underachieving. Few experts understand the proper valuation procedure for measuring the rate of return and neither the courts, nor the experts who testify before them, understand the proper relationship between the right to preserve assets and the measurement process.
There are many things that contribute to this breakdown. But one thing is certain, when risk on investments is related to the amount of return expected, the error in the measurement process is directly related to that risk. There is a vast difference in the result when rational use for measurement is factored into the process. When the rate of return is measured on a fund that allows earnings to accrue, the realized rate of return will be much greater than when the earnings are withdrawn on an annual basis to pay support. This is because a volatile market produces peaks and valleys. The S&P 500 made great gains from 1990 to 1999. Yet some individual investments did poorly in some years while the overall result was fantastic. Losses in principal occur when the withdrawals exceed the income earned in that year. When the market dropped by one-third following 12/31/2000, the principal withdrawn was maximized. When yearly earnings are not withdrawn, a full recovery can be expected when the S&P 500 bounces back to its pre-2001 level.

Measuring Rate of
Return on Bonds
Some have suggested the industry adopt the interest rate that could be imputed using long-term bonds as a standard. The first thing wrong with this suggestion is it fails to recognize a correct valuation factor, holding that one must look to today and not long-term predictions. The second thing wrong with this suggestion is that the marketability of the bond’s trade-value is directly related to short-term interest rates. The market value of the bond adjusts so that the overall rate is competitive with short-term interest rates. While the bond’s quality and duration in maturing to face amount has some affect on its price structure, the trade-value is always related to short-term interest rates readily available in the marketplace.
The coupon rate is the rate of return that is paid on the face amount of the bond. If the bond pays a coupon of seven percent of face, and the short-term interest rate is four percent, one will likely pay a premium for the bond. This means that one pays much more than the face amount to receive the income. Thus, the bond matures for much less than what was paid, meaning that a seven percent annual return includes a likely three percent reduction in principal for each year. That is also before the coupon rate is adjusted to an actual rate of return. The coupon rate is based upon the face amount of the bond. The rate of return is based upon the amount paid for the bond. Great care must be exercised before erroneously concluding that the bond pays seven percent. Using the coupon rate also fails to factor in downside risk, which has nothing to do with the above relationship.
There are as many ways that the error of the measurement can occur as there are various assets in which to invest. Previous articles on the topic have concentrated on the lack of standardization on what represents income. While this is a great source of concern, many understand it can cause error. As such, when it can be shown to produce a significant reduction in assets, these facts form the basis to successfully petition the trial court for modification of the alimony amount based upon a substantial change of circumstances. Prevailing at trial at least limits the damage caused by the error. But when the source of error is not recognized nor understood, the fact that that spouse suffered a loss in assets cannot be used to prove anything. As such, the error that is not understood has far more devastating consequences.

Theory of the Rate of Return
Actuaries and economists have operated by the principle that real income is three percent and any income realized above that threshold adds an inflation component. Inflation cannot be considered income because, by including it, inflation transforms pure income into an income stream. An income stream liquidates a portion of the asset. The inflation component of income is just as detrimental to the principal of an asset as an annuity payout or a mortgage receivable. In each case, the asset has less value at a later date.
Above is a yardstick by which we measure long-term growth. Long-term growth is not to be used to demonstrate an ability to pay alimony. The short-term result adjusts this amount considering the risk reward and risk loss. Risk reward cannot exist by itself. When the rate of return includes risk reward, risk loss is always around the corner. Using risk reward in the alimony computation involves the same concept as using gambled winnings to demonstrate a future ability to pay alimony. It is questionable whether risk reward should be recognized at all because to do so provides a built-in reduction of principal (at a future date) when the risk reward is replaced by risk loss. With market fluctuation, the three percent realized income rate is actually half that amount when three percent is withdrawn even when the market is down. This means that if the asset is to be preserved, use of two percent places the real principal in jeopardy. Homes in Florida have increased by far more than an annual three percent pure rate of return, but trial courts still fail to impute income to the marital home at the same time that they exaggerate the real rate of return on the payer’s assets. This practice makes it clear, in Florida, only the recipients of alimony enjoy the right to preserve assets.

Income Should Not Include an Inflation Component
By excluding an inflation component, the measurement process avoids much of the problem brought about by the lack of standardization on what income to impute. Excluding an inflation component is also consistent with preserving assets.23 It is easier to exclude than deal with the differences in asset structures when some assets include the component in the structure and others do not. A standardized uniform rate applicable to all assets is preferable and a viable solution. Thus, instead of using long- or short-term bond rates to establish the amount, it is reasonable to use the three percent pure rate of return discussed above. As the short-term interest rate grows, the assets used to pay alimony liquidate in value much faster. By including inflation in the payout, the result is the protection of the recipient’s assets at the expense of the payer’s assets. Cost of living increases raise a need for higher alimony and, thus, provide grounds for modification. The difference between the two approaches is that the alimony recipient is automatically provided with a built in protection against the rising cost of living. This is paid for with the erosion of the payer’s assets. Under a modification proceeding, before the recipient is provided an increase, the payer has to have an ability to provide it. Failure to protect assets by excluding the inflation component of income often leads to its depletion.

Imputing Income for
Voluntary Contributions
The prevailing thinking is if the contribution to the retirement plan is voluntary, then it is imputed back as income. But is it really voluntary? Before dealing with the issue, it must be said that F.S. §61.08 limits the definition of “income” to a consideration of all available sources of income when measuring ability. If it was paid as a contribution to the retirement plan, it is not available under any sense of the term. The only place that this voluntary condition attaches to available income will appear in §61.30, but then again, the issue is entirely different with child support than alimony. When there is intentional manipulation of income, the definitions under §61.30 appear equally applicable to both child support and alimony because the intentional lowering of income affects both awards. Under §61.30, child support is seldom bound by any upper limitations. Children share in higher support payments when the spouse paying the support has “good fortune.”24 With alimony payments, spouses do not. The lifestyle established during the marriage strictly sets the need for alimony.
The manipulation of income must be intentional even when the manipulation applies to underemployment and unemployment. The trial court must make this finding in the record and there must be competent evidence to support it.25 In fact, our Supreme Court expanded the requirement to impute income by recognizing that a voluntary reduction in the best interest of the spouse, or children for whom the support payment is intended may not qualify to impute income.26 This new criteria was raised in Overby v. Overby, 690 So. 2d 811 (Fla. 1997), which shows that children rarely benefit from a reduction in support and, thus, the best interest standard of this decision has a very limited application to alimony. It applies only to a significantly higher lifestyle need than could be supported with available income when setting the initial alimony payment. The point is even when there are narrow, but possible exceptions to intentional manipulation (no matter how unlikely), there are circumstances in which intentional manipulation may not require imputing income. Thus, the ability to exercise voluntary control to manipulate income is sometimes not sufficient to justify the imputation of income. It is necessary to show that there was intentional manipulation before imputation of income can apply.
The concept applies equally to retirement plan contributions. This means where the elected deferral was historically less in prior years, this reasoning would support the conclusion of manipulation of income. It could definitely be proven when the owner of a closely held business elected to install a plan near the end of the marriage. But when the plan was installed years earlier and the alimony payer made substantial contributions in most of the prior years, there is no evidence whatsoever to suggest an intentional manipulation of income theory. Furthermore, most 401(k) plans always encourage the voluntary deferral of income with an employer match. That contribution match is lost without the employee share. Is the employee share really voluntary under these circumstances? When the 401(k) plan contribution is a replacement plan for a far more substantial traditional plan, terming the participation as voluntary is the same as concluding that the employee’s need to retire is lessened by the employer now furnishing the employee with a less rich retirement plan. This fact alone demonstrates that there is nothing voluntary about a 401(k) deferral. Finally, alimony recipient spouses generally benefit by the income deferral. They benefit while married because the contribution creates property that they share. They also share in the future contributions at retirement with the extra income produced, thereby lessening the amount of alimony that may be relied upon when the payer no longer receives the income from the job. Finally, it was shown earlier that treating the deferral as voluntary and imputing it back as income leads to the absurd result that the other spouse receives nearly 100 percent of all past and future contributions either as property or future alimony payments while the alimony recipient lives a higher lifestyle than the payer who by his or her labor produced this asset.

Imputing Income for the Dissipation of Assets
When an asset has been dissipated, the court’s finding of dissipation implies an element of intent.27 Such intent to dissipate serves as a route to manipulate income in the same manner as failing to use best efforts to invest in an asset. When there is no intent, there is no income lost, but less assets to divide in equitable distribution and less income on account of this sole fact. Thus, when income is imputed to assets lost without the requisite intent, it creates only more assets with the imputed income. When there is more need to go around than there is income to pay (which is true in most cases), imputing extra income supports a higher alimony payment. When the party guilty of the dissipation is the same party paying alimony, imputing an income base to fictitious assets works to decrease that spouse’s share of equitably divided assets by the assets that were dissipated. The income it provides to produce more alimony than could otherwise be provided by the assets left enriches the other spouse’s assets by the higher income. This is not a redistribution of wealth because, if not for the dissipation, the alimony recipient would have more assets anyway. If the dissipating spouse is instead the party receiving alimony, that spouse receives a real debt in order to create a fictitious asset. This reduces the alimony recipient’s assets at the same time that it lessens the payer’s payment, with the difference creating an asset for the payer. In this case, the amount imputed supports the liquidation of that debt over that party’s lifetime. This places the innocent party at parity with his or her position absent the dissipation. The redistribution actually creates more assets than that party is entitled to receive at dissolution. As the redistribution is created with an increased alimony payment, the transaction violates Mallard. Worse yet, the transaction creates an improper redistribution of wealth.


1 Canakaris v. Canakaris, 382 So. 2d 1197, 1201-1202 (Fla. 1980).
2 Id. at 1201.
3 See Woolf v. Woolf, 901 So. 2d 905 (Fla. 4th D.C.A. 2005).
4 See Smith v. Smith, 737 So. 2d 641, 643 (Fla. 1st D.C.A. 1999).
5 Id. See also, Cardillo v. Cardillo, 707 So. 2d 350 (Fla. 2d D.C.A. 1998).
6 See Laz v. Laz, 727 So. 2d 966 (Fla. 2d 1998).
7 See LaSala v. LaSala, 806 So. 2d 602 (Fla. 4th D.C.A. 2002); Nelson v. Nelson, 588 So. 2d 1049 (Fla. 2d D.C.A. 1991).
8 See Cochran v. Cochran, 819 So. 2d 863, 864 (Fla. 3d D.C.A. 2003); Paul v. Paul, 684 So. 2d 1211, 1214 (Fla. 5th D.C.A. 1995).
9 This is because lifestyle need must be based on the marital standard of need. Irwin v. Irwin, 539 So. 2d 1177 (Fla. 5th D.C.A. 1989); Walton v. Walton, 557 So. 2d 658 (Fla. 3d D.C.A. 1989); Szuri v. Szuri, 759 So. 2d 709 (Fla. 3d D.C.A. 2000).
10 McLean v. McLean, 652 So. 2d 1178, 1180-1181 (Fla. 2d D.C.A. 1995); LaSala, 806 So. 2d 602. The procedure is correct because it is unfair to project an income that cannot be achieved today. Such a practice causes both parties to liquidate assets. It is also unfair to arbitrarily project need that is not necessary today because it artificially increases the alimony payment. The projected result for both income and need may never be achieved. It is speculative. As neither the flow of alimony can be reversed, nor the amount increased to replace lost assets, one must use current, not anticipated, data.
11 McLean, 652 So. 2d at 1181.
12 Lauro v. Lauro, 757 So. 2d 523, 525 (Fla. 4th D.C.A. 2000).
13 Id. at 524.
14 Canakaris, 382 So. 2d at 1202.
15 McLean, 652 So. 2d at 1180-1181.
16 Canakaris, 382 So. 2d at 1202.
17 Id.
18 Canakaris, 382 So. 2d at 1180; Goodman v. Goodman, 797 So. 2d 1282, 1284 (Fla. 4th D.C.A. 2001).
19 Mallard, 771 So. 2d at 1140.
20 Id. at 1140, citing Boyett v. Boyett, 703 So. 2d 451 (Fla. 1997).
21 Gentile v. Gentile, 565 So. 2d 820, 823 (Fla. 4th D.C.A. 1990).
22 Acker v. Acker, 904 So. 2d 384 (Fla. 2005), determined that the 16-year case law legacy interpreting Diffenderfer v. Diffenderfer, 491 So. 2d 265 (Fla. 1986), is incorrect. It was previously thought the accrued benefit of a retirement plan is divided in equitable distribution, that portion of the benefit cannot later be used in determining an ability to pay alimony. The Acker ruling determined that interpretation is incorrect.
23 Brock v. Brock, 690 So. 2d 737, 741 (Fla. 5th D.C.A. 1997).
24 Finley v. Scott, 707 So. 2d 1112 (Fla. 1998).
25 See note 8.
26 Overby v. Overby, 698 So. 2d 811, 813-15 (Fla. 1997).
27 See Fla. Stat. §661.075(1)(i).

Jerry Reiss, ASA (1982) Enrolled Actuary (1983), has written over 18 articles on valuation topics, 11 of which were published in bar journals. He provides expert testimony and support services on employment topics, equitable distribution, and alimony. He maintains offices in Ft. Lauderdale, Clearwater, and Orlando.

Michael R. Walsh is a board certified marital and family lawyer in Orlando. He is a frequent author and lecturer for The Florida Bar, as well as many other state and national associations. Since 1977, he has been a fellow of the American Academy of Matrimonial Lawyers.

This column is submitted on behalf of the Family Law Section, Thomas Julian Sasser, chair, and Charles Fox Miller, editor

[Revised: 02-10-2012]