What is Considered Phantom Income?

Complex Divorce Lawyers Serving Denver and the Surrounding Areas

In complex divorce cases, one or both of the spouses may be entrepreneurs or business owners, with significant amounts of money invested in their company or products. This can prove deceptive in divorce-related matters, such as property division and spousal support. While tax returns may show a large amount of holdings and assets, their actual cash on hand may be significantly less. In these types of cases, you need an experienced Denver divorce attorney to ensure you do not end up paying more than you should.

Common Types of Phantom Income

Tax Act describes phantom income as money you do not actually pocket, yet it flows through to your IRS income tax returns. In addition to increasing your overall liability on your state and federal returns, it can have a significant impact in your divorce proceedings. By making it appear that you have more cash on hand than you actually do, this type of imputed income can end up costing you in terms of marital property and asset division, along with being a factor in alimony determinations.

Phantom income can occur for a variety of reasons. If you have forgiven debts, such as when going through bankruptcy proceedings, if you had a student loan forgiven, or had a house that went through a short sale or foreclosure, this is likely to result in phantom income. In high asset divorce cases, phantom income often occurs among business owners and entrepreneurs as a result of the following:

• If you own an S Corporation or LLC, which requires you to pay taxes before collecting your earnings;
• If you have invested sweat equity in a start-up, and received a percentage of actual equity in the business in return;
• If you own any type of company or business in which your earnings are automatically reinvested either in the company itself or in inventory and supplies.

Prevent Phantom Income from Impacting Your Divorce

Under the Colorado Revised Statutes, the Uniform Dissolution of Marriage Act provides guidelines for divorce procedures in both simple and complex, high asset divorce cases. When there are disputes over marital property division, alimony, or the care and custody of children, you will be required to produce additional evidence so that a fair and reasonable decision can be made in your case. This involves financial disclosure forms, listing your individual income and assets. If you have phantom income, while your monthly bank statements may show a certain amount of money, your tax returns are likely to show significantly greater amounts. This could lead the court to believe that you are hiding assets, and any decisions made could reflect these higher amounts of income.

At Nicholas Family Law, we work diligently to prevent this from happening, gathering additional evidence as to your income, negotiating with your spouse’s attorney, and making arguments before the judge defending your rights and interests. Call or contact our Denver divorce attorney online and request a consultation to see how we can assist you today.