Finances and Divorce: What Constitutes Income?

Divorce financial analyst JoAnne HoltBy JoAnne C. Holt,  Divorce financial analyst

“Income” for purposes of calculating child support and alimony is not always as evident as one would think. Let’s look at several scenarios:

  • Employee who receives a W-2
  • Self-employed professional
  • Partner with another unrelated business person in several ventures

At first blush you might think someone who is an employee and receives a single Form W-2 at the end of the year is a very simple case when it comes to the income calculation. Not so fast. I had a recent case where the employee received a W-2 for wages and bonuses. What is NOT included on the W-2 are payments the employer makes for the benefit of the employee and excludes from his/her wages. The employer pays for the golf membership at an exclusive club, provides a monthly allowance for golfing, entertainment, utilities for the residence, lawn maintenance for the residence, free lodging at a beautiful home and more.

Is this “in-kind” income? Yes. In-kind income is the payment in the form of goods and services, rather than in cash. In order to fully account for the “income” you should contact human resources or the owner for a detailed list of any “benefits” or in-kind payments for the benefit of the employee. You will likely be required to, and should, sign a non-disclosure agreement for this information. The example just provided is not being handled correctly for tax purposes and this happens more often than not.

A self-employed person’s business, depending on the business, can be relatively easy to determine income or very difficult. If the person’s business deals a lot in cash, and there are no employees, you have to rely on the integrity and character of the person and compare that with a lifestyle analysis. If they are living beyond their means, they are likely not reporting income.

I had a case where one party owned a coin laundry business. The party insisted his/hers income was very low. When I reviewed the credit card statements and cancelled checks for the household, I found absolutely no payments for gas, groceries, clothing, entertainment and more. This person was seen all over town eating out and shopping, wearing very nice clothes, taking lavish vacations, etc.  As soon as I started down the road of calculating the income based on the lifestyle there was a settlement.

Another situation is where you have a party in business with one or more business partners. This may at first seem to be a good scenario since the party in the divorce doesn’t appear to have “control” (more than 50% ownership) and thus would have less opportunity to hide income. Partners have a common goal: keep the business going and keep the income as high as possible. If that means they have to help a partner for a possible future benefit, they just might.

I have seen across the board salary reductions “due to the economy” only to have large bonuses paid out the next year after the divorce is final. It was discovered only three years later when an action for modification was brought by the payor spouse. We suspected this at the time, but could not prove it.

In summary, even the small cases deserve a review by a financial professional. A divorce is often the single most significant financial transaction many will encounter in their lifetime. Spend the extra money to make a fully informed decision.

 

JoAnne C. Holt is a Florida-based CPA, certified family mediator, and certified divorce financial analyst. She also founded www.standbyhousing.com, an organization that presents alternative housing solutions to fathers going through a divorce. Her columns on finances and divorce run monthly on DadsDivorce.com.

End of Content Icon

Leave a Reply

Your email address will not be published.