An individual’s enhanced earnings capacity is computed as the present value of the enhancement in earnings over his/her expected work life that results from obtaining a professional degree, license or specialized training. The definition of value of the enhanced earnings capacity considers the holder’s knowledge, abilities, expectations of risk, and earnings potential. Other factors, such as gender, specialization, and geographic location are also considered.
The approach to calculating the enhanced earnings capacity attributable to the holder of a professional degree, license, or specialized training was established in 1985 as a result of a New York Appellate Court’s decision in O’Brien v. O’Brien. This concept was later reaffirmed in 1995 in the New York Court’s decision in McSparron v. McSparron. Subsequently, there have been a host of other notable cases.
The methodology employed to compute the enhanced earnings calculation can be broken down into several steps:
1. Determine the earnings capacity of the holder with the degree (i.e. Top- Line Earnings).
2. Determine the earnings capacity of the holder without the degree (i.e. Base-Line Earnings).
3. Compute the after-tax earnings of both the top-line and base-line amounts by applying federal, state and local income tax rates, as well as the social security and medicare tax rates in effect on the valuation date.
4. The difference between the net after-tax earnings of each earnings base is the net enhanced earnings capacity attributable to the degree.
5. Compute the present value of the net enhanced earnings capacity over the holders remaining expected work life.
This computation is specific to matrimonial matters within New York State. If your case requires such a computation, please feel free to call our office for assistance. In the interim, feel free to review our Enhanced Earnings Capacity Questionnaire.