Phantom and Imputed Income in Divorce

,
Phantom and Imputed Income in Divorce

Income plays a significant role in divorce proceedings. The parties' incomes are central to determinations about child support and spousal support (alimony). Complete financial disclosure is required as part of the divorce proceedings and this disclosure includes income. The court cannot set child or spousal support without accurate income numbers. 

While income seems like a fairly straightforward concept, there are aspects of it that can be manipulated to increase or decrease the reported figures. Understanding the ways income can vary can be instructive in obtaining a better outcome in your case.

Phantom Income

Phantom income is income that you don't actually receive but which flows through your tax return and seemingly raises your income. This type of income makes it appear as if you earn more than you actually do and can increase your liability for child and spousal support in your divorce. There are a variety of ways phantom income can make an appearance in your case:

  • Forgiven debts If you have debts that have been forgiven, the amount forgiven is considered income. A student loan that has been forgiven (such as in the case of a medical school loan forgiveness) is an example. Debts forgiven through personal bankruptcy are another. 
  • Canceled debts Canceled debts are similar in nature to forgiven debts, except the debt holder cancels the amount owed as opposed to formal governmental forgiveness.
  • Equity If you have invested sweat equity into a business and in return were given a percentage of equity, this is income because you receive something of value.
  • Real estate Previous tax deductions on a piece of real property may increase the actual value of the sale over the sale price, generating additional income.
  • Reinvested earnings If your income from a business is reinvested into the company and not paid directly to you, this is still computed as income. This will appear on Schedule K-1 of your tax return. 
  • Zero coupon bonds These types of bonds do not pay interest until they mature, yet holders may be liable for taxes on the interest in the interim.

Phantom income generates a higher income on your tax return when in reality none of those funds actually make it into your bank account. If the court relies solely on what the tax returns show, you could be required to pay higher child and/or spousal support than you would be if your actual income were used for the calculation. If you are the spouse seeking child or spousal report, it is to your advantage to have your spouse saddled with as much phantom income as possible. 

Imputed Income

Another situation that may arise about income in your divorce case is imputed income. In some sense, imputed income is the opposite of phantom income. Imputed income is benefits or payments a person receives that are not counted as taxable income, but which the court may decide should count as income for the purposes of the case. 

In New York, imputed income may only be considered in child support matters and not in spousal support matters. The more imputed income the court attributes to you, the more you may be required to pay in child support.

The vast majority of imputed income arises from fringe benefits from employment and could include employer or business-provided items such as:

  • Wardrobe
  • Prizes and awards
  • Other business expenses or reimbursements
  • Moving expense reimbursement
  • Meals
  • Life insurance
  • Free vehicles or transportation
  • Free housing
  • Fitness memberships
  • Educational assistance
  • Discounts
  • Disability insurance

In addition to fringe benefits, New York courts allow income to be imputed from holding what are called non-income assets, such as undeveloped real estate and artwork, which do not produce income until they are sold, but do accumulate value in the meantime. Income can also be imputed if a person receives significant amounts of money or items from friends or relatives. 

Another avenue for imputed income is if a person double dips on expenses. If your spouse works for a company as an employee and also owns their own business, they may be submitting one business expense to both companies for reimbursement, which can be imputed income. 

Imputed income can also include wages the person ought to be earning, but is not (such as when someone quits their job to avoid having to pay child support – known as elective unemployment). If someone is intentionally underemployed or unemployed, income can be imputed at the level they should be earning. 

The rationale is that the other parent has a right to child support from the income that the earning parent should be receiving if they paid diligent attention to their professional life. When a person chooses to take a lower-paying job (or no job at all) during the course of a divorce case, the court views this as acting in bad faith. However, a parent choosing to stay home with their children does not fall into this category and does not impute income.

If the non-moneyed parent is the person whose income is being scrutinized and they suddenly have one good year, the court will generally not consider this representative of their earning capacity until it becomes a clear trend. 

New York courts must consider the following when deciding whether to impute income due to unemployment or underemployment status:

  • The parent's past earnings
  • The parent's earning capacity
  • The educational background of the parent
  • Income earned by people with comparable professional or educational backgrounds
  • Whether the parent is using their best efforts to locate appropriate employment 
  • Whether the reduction or loss of income was voluntary (such as leaving a job) or involuntary (such as being fired or demoted)

In addition to these factors, the court must consider other factors the parent in question presents to defend themselves, such as the economy (or conditions within that parent's specific industry or company), medical reasons for a change in employment status, or a change in career path (such as a physician who decides his true calling is as a botanist). 

Once the court determines that there is imputed income, it has great flexibility in determining how much income to impute and then how to apply the child support standards to that amount. 

The amount paid in child or spousal support is directly tied to how much income the divorce court uses to make the calculation. It's important to discuss all possible income with your attorney. 

Share


Dror Bikel

Dror Bikel is a Manhattan-based divorce and child custody lawyer. He founded and leads Bikel and Schanfield, New York’s best-known firm for high-conflict matrimonial disputes.

As founding partner of the Manhattan-based firm, Bikel & Schanfield, LLP, Dror Bikel’s 20+ years of trial and litigation experience offers invaluable insight in facilitating settlements, mediating disputes and obtaining superior results for his clients. A recipient of the New York Super Lawyers Award, Mr. Bikel is voted among the Top 5% New York State Family Law Attorneys.

To connect with Dror: 212.682.6222 or [hidden email] or online
To learn more about Bikel & Schanfield: bikellaw.com
To learn more about Dror's book The 1% Divorce: When Titans Clashsuttonhart.com

For media inquiries or speaking engagements: [hidden email]



Recent articles: