Divorce can be one of the biggest challenges that you’ll ever face. It’s even more difficult when you have reason to suspect that your soon-to-be ex might be holding something back. After all, every dollar that goes to you is a dollar that doesn’t go to your ex. And when you’re facing the prospect that your resources will now be supporting two separate households, that’s important.
If you’ve been the supportive spouse, or otherwise not involved in the family finances, you might be especially vulnerable to this manipulation. Fortunately, divorcing spouses are required to submit a financial affidavit as part of the divorce process. A financial affidavit is a sworn statement that attests to the following:
- Required payments
In other words, a financial affidavit provides an accounting of everything you own, everything you owe, all the money that comes in, and all the money that goes out. Accurate affidavits help to ensure that assets are divided equitably, and that each spouse is treated fairly.
However, this process isn’t foolproof. Even though each party is supposed to provide supporting documentation to support their affidavits, things can fall through the cracks. Here are five things you and your attorney should be on the lookout for when it comes to the income portion of a financial affidavit:
1. Underdeclaring income.
Most employers have standard payroll & accounting processes that are hard for a single employee to manipulate. However, if your spouse is involved in a ‘side gig,’ like consulting work, or a owns part of a business, then you might want to pay attention. Specifically, you’ll want your attorney or financial expert to take a close look at either Schedule C of your tax return (for independent contractors or people with a ‘side gig’), or the business tax return for any business entity your spouse is a part of.
Sometimes, it can be as blatant as hiding cash transactions as ‘under the table’ income. In today’s increasingly digital world, this is becoming more and more rare. However, if this is a significant concern, or you have a feeling that there is a lot of money at stake, then it might be worth hiring a forensic accountant. A forensic accountant can help you track down income and assets that might be hidden in accounts you don’t know about.
2. Double-counting expenses.
This could happen in a number of ways, either by mistake or by design.
If your spouse owns a business or has a side gig, this can happen as people sometimes claim business expenses on their affidavit. This can especially happen in businesses with home offices, where the expense could feasibly be either a personal or business-related expense.
Prudent tax planning involves legally declaring legitimate business in order to lower your taxable income. Most business owners learn this over time. However, if some of those expenses are also declared elsewhere on the affidavit, then that lowers the amount of income that appears to be available for spousal support (or alimony).
For example, let’s say your spouse has a cell phone that is used only for business. The monthly bill is $100. That $100 should either show up as a business expense in their tax return or as a personal expense on the affidavit, but not both. If this phone is only for business, it should not be listed as a personal expense.
Here are some more examples of common expenses that might be double-counted on self-employment or business-related income:
- Health insurance
- Vehicle expenses (if your spouse uses the vehicle for business purposes)
- Subscription services or utilities (like internet access)
This can also happen with W-2 employees. For example, many employers allow allotments to go towards health insurance, loan payments, or other expenses. You’ll want to verify the affidavit with information on the paystub to ensure these expenses aren’t double-counted.
3. Misrepresenting Social Security contributions.
This is a common omission that can be hard to catch. However, it’s worth paying attention to, particularly if your spouse’s income is above the Social Security threshold.
Employers are required to withhold 6.2% of an employee’s earnings for Social Security, up to an annual salary limit, set each year. In 2019, that limit is $132,900. After that annual salary is reached, the employer no longer withholds Social Security taxes from the employee’s paycheck. If your ex’s salary (including bonuses and commissions) is expected to be more than the annual limit, you’ll want to make sure that the affidavit reflects the average monthly amount.
For example, if your ex earns $20,000 per month, the Social Security withholdings for January would be $1,240. If you multiply that by 12, you would get $14,880. However, the 2019 ceiling for Social Security withholdings is only $8,239.80, so the financial affidavit should only reflect $686.65 ($8,239.80 divided by 12 months). If the financial affidavit reflects the full $1,240 as a monthly expense, then you are missing an opportunity.
4. Not including retirement plan contributions.
Employer sponsored retirement plans are an outstanding way to save for the future. The ability to contribute to a 401k, SEP, or other retirement plan represents the largest tax shelter available to most Americans. Also, many employers match contributions to their plans, which make them even more attractive.
With that said, retirement plan contributions are voluntary, so they should be included in your spouse’s stated income. The way to check would be to verify the affidavit with the pay stub to ensure the contributions are added back into stated income.
5. Not declaring deferred compensation.
Deferred compensation, particularly for executives, can be fairly difficult to catch. If this is a concern, you’ll want your lawyer to pay particular attention. While a good attorney should be asking all the right questions during the discovery process, here are some things you can do to ensure this doesn’t slip through the cracks:
- Look online for the company’s employee handbook, for descriptions of the various benefit plans available to employees. If your spouse has a deferred compensation plan, the plan should be listed in the handbook.
- Request copies of the most current statements of all benefits accounts.
- Request a copy of the plan document for each plan. Note: There might be more than one plan, so you’ll want to request a copy for each one.
- Request additional information that might help your attorney determine if any of the plan accounts can be divided in your divorce.
Divorce is a difficult and emotionally taxing process. However, you owe it to yourself to ensure you’re on the best financial footing as you prepare for the next stage of your life. Making sure you and your soon-to-be ex-spouse are on the same page is the best way to do just that. And if you’re ready to take the next step and work with a financial planner, you can learn more about how we work with clients right here.