Divorce can be one of the biggest challenges that you’ll ever face. Divorce usually puts both spouses in a worse financial situation than when they were married.
The same gross income that supported one household has to support two separate households. And the property distribution now goes to two different households.
So it’s important that the property division process is fair to each spouse. But it’s equally important to ensure that the stated income is correct. And that a supportive spouse’s claim to income properly reflects the true average monthly income for the household.
But this can be more difficult when the working spouse is hiding income on their financial affidavit form. This article aims to:
- Provide some background on how the financial affidavit is supposed to work
- Identify 5 common ways your ex-spouse can hide income
- Provide some tips to help protect yourself from being manipulated
Without further ado, let’s get started.
Purpose of the financial affidavit
Divorcing spouses are required to submit a financial affidavit as part of the divorce process. Furthermore, a financial affidavit is a sworn statement, similar to court testimony. Similar to testimony, lying on a financial affidavit or submitting a false statement is subject to perjury.
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 net assets are divided equitably, and that each spouse is treated fairly.
How the financial affidavit is supposed to work
If you’ve been the supportive spouse, or otherwise not involved in the family finances, you might be vulnerable. It’s important for you to understand how the financial affidavit works. That way, you can be aware in case your spouse submits a false statement.
Because divorce cases are handled according to state law, each state may have slightly different versions of the financial affidavit for divorcing couples to use. Generally speaking, a financial affidavit is a financial statement that attests to the following:
- Required payments
Let’s take a closer look at each section as well as the supporting documents you should expect to see. That way, you can be familiar with what information goes in each section, regardless of what the form looks like.
The income section of a financial affidavit represents income from all sources. You’ll probably be asked to break down gross income (before taxes) as well as net income, after taxes. In addition to wage income, this section might include things like:
- Income from investments, such as capital gains, interest or dividends
- Business income
- Income from real estate
- Payments TO a spouse from a previous marriage under a family court order
Usually, this will be supported by documentation like federal and state income tax returns, recent pay stubs, and investment account statements.
Also known as the expense section. Usually, each spouse will list all of their monthly expenses. From here, required payments are determined based on calculations in the financial affidavit.
Generally speaking, required payments include things like:
- Household expenses. This could be things like mortgage payments, real estate taxes, homeowner’s insurance, groceries, and utilities.
- Transportation expenses. This would include things like car payments, gasoline, maintenance, and insurance. Or it might include commuting costs if you live in a big city like New York.
- Personal expenses. Reasonable costs might include out of pocket health care costs, grooming, and personal fitness.
- Payments on previously incurred debt. This would be things like outstanding credit card debts or personal loans. This can be a particularly tricky place for one spouse to take advantage of another. If possible, credit cards should be paid off before the divorce is final.
You’ll be asked to provide statements for these payments. From there, each state has guidelines to help determine what is a reasonable payment amount for each expense category.
The next two parts, assets & liabilities, combine to make up your net worth. Let’s start with assets.
Assets include things like:
- Bank accounts, like checking or savings accounts
- A primary residence
- Real estate used for rental income
- Business interests
- Cash balances on outstanding life insurance policies
Assets can also include things that might not show up on a bank statement, like your husband’s 401k plan or deferred compensation. Usually, you’ll be asked to provide a financial statement for each account.
This could include bank statements and investment statements. But if you think your spouse is hiding assets, you should start by looking at their tax return.
Once you’ve identified all of your assets, you’ll need to list your liabilities.
Your liabilities will be the sum of your outstanding debts. This would include things like:
- Outstanding mortgage balance
- Car loan balances
- Outstanding credit card bills (total balances)
- Previous judgments
- Student loans (if obtained during the marriage)
If your assets are greater than your total liabilities, then your divorce attorney or mediator should help you equitably divide them. If it’s the other way around, then you probably have significant financial issues that you should discuss with a debt counselor.
Now that we’ve discussed the whole financial affidavit, let’s zero in on the income section.
Each party is supposed to provide supporting documentation to support their affidavits. But if your ex submits a false statement and is hiding income, you need to be aware.
Here are five things you and your family law 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. This makes it hard for a single employee to manipulate.
But what if your spouse is involved in a ‘side gig,’ like consulting work? Or they own 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.
But 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 crucial financial information 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 is especially common in businesses with home offices.
In a home office, a reasonable expense could feasibly be either a personal or business-related expense. Or both.
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).
Business owner 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 instance, 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. It’s something worth paying attention to, particularly if your spouse’s income is above the Social Security threshold.
Social Security Background
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 2022, that limit is $147,000. 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.
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 2022 ceiling for Social Security withholdings is only $9,114.00. So the financial affidavit should only reflect $759.50 ($9,114.00 divided by 12 months).
If the financial affidavit reflects the full $1,240 as a monthly expense, then you are losing vital cash flow from a false expense.
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 retirement plans. In many instances, this makes them even more attractive than IRAs.
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.
A good attorney should be asking all the right questions during the discovery process. But here are some things you can do to ensure this doesn’t slip through the cracks:
Look online for the company’s employee handbook.
You’re looking 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.
Get copies of the most current statements of all benefits accounts.
Even if you don’t know what to make of them, your accountant or a tax-focused financial advisor should help you figure out what’s going on.
Request a copy of the plan document for each plan.
Note: There might be more than one plan. If that’s the case, you’ll want to request a copy for each one. And you’ll want to have someone help you go over each plan to make sure you’re not missing anything.
Of course, you can always ask for additional information that might help your attorney determine if any of the plan accounts can be divided in your divorce. But you’ll need to educate yourself enough to know what you’re looking for.
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. Don’t fall victim to dire financial circumstances because you let your ex take advantage of the situation.