Posted on in Divorce

b2ap3_thumbnail_shutterstock_1134923861_20200909-194446_1.jpgDoes your Judgment of Dissolution of Marriage reference an annual or quarterly true up calculation for support? Are you unclear on what that means and confused on how it is calculated? It is common for you to feel overwhelmed and uncertain about your obligations or what you are entitled to from your ex-spouse when these clauses are incorporated into your Judgment.

In many cases, temporary or permanent support orders for both maintenance (formerly known as alimony) and child support, include provisions for what’s known as a “true-up.” This includes final divorce decrees, either after the court’s ruling or more commonly via a Marital Settlement Agreement. A true-up is designed to capture income for support purposes that was not factored into the monthly support obligation. It also ensures that all income for statutory purposes is considered and equitable support amounts are being paid. 

A true-up is often appropriate in situations where the payor’s income is more complicated than standard base pay. If both parties have only a base salary or base hourly wage and set hours (their incomes do not vary week to week or month to month), a true-up is not necessary, as the amount of support paid should be consistent from month to month and match up with the year-end numbers. However, if a payor receives a varying bonus or bonuses throughout the year, is entitled to commission pay, receives other incentive compensation, has overtime or fluctuating hours, or has a side job earning other income, then a true-up is often beneficial to both parties. For example, if support were set on a prior year’s total income where a payor had many commissions, and there was no true-up, the payee would have been substantially underpaid and vice versa. True ups solve this problem by ensuring the correct amount of support is paid.

A true-up is essentially a percentage of money the payor is ordered to pay based on the additional income he or she earns in a given year over their base salary. The percentage that a payor would owe is calculated by dividing the payor’s regular child support obligation by the payor’s monthly net income. For example, If a payor’s regular monthly income is $5,000 per month and they have an $800 per month child support obligation, then they would owe 16% of any additional income they earn in a given over their base salary ($800/$5,000). 

Drafting appropriate true-up language is an art and requires a complete understanding of what a true up is, what income is being included, and how the calculation is to occur. The simplest forms of true-up’s are based upon gross incomes, making the calculation a simple math problem using total gross income from both parties. However, even with a gross income calculation, unless it is clearly specified what source the gross income is taken from (box 5 wages of a W-2, line 7b of your 1040) there can be disputes over what is considered “income.” For example, if someone is self-employed or has rental income, how is their gross income determined? Before or after deductions are taken? How do you handle deductions that are allowable for IRS purposes but not necessarily support purposes (such as depreciation or a car allowance)?

If a true-up is based upon net income, now that Illinois law provides that both child support and maintenance are calculated based upon net income, there is also the added complication of determining what net income is. If the court order does not specify a method for calculating net income, the parties are left calculating it using a mirage of sources. One party may use the bonus pay stub withholdings while the other may use an effective tax rate from a prior year’s tax returns. Some may reference tax brackets and estimate taxes using state and federal percentages. Ultimately, there needs to be an agreement on how to calculate net income, or there will inevitably be a dispute which requires attorney involvement or the court’s input. 

Finally, now that the laws are such that both parties’ incomes are considered for support purposes, true-up language must also account for what happens if there is an overpayment of support, specifically, if the payor’s base pay or anticipated pay is less than expected, or the recipient of support’s income is much higher than anticipated at the time of calculation of the monthly obligation. Too frequently drafting errors in an agreement result in a payor making payments that ultimately exceed statutory support, and results in them later being unable to recoup their overpayment.

Understanding the language in your order regarding your support calculations is key as these types of issues can have a substantial effect on the amount of support you are paying or receiving. Having the language appropriately drafted ensures your understanding is consistent with your ex-spouses, as well as limits the potential for future litigation.

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