While many people are generally aware that each spouse’s income is an important factor in determining support obligations and equitable distribution in a divorce in New Jersey, they often do not understand what constitutes as income. Phantom income is one of those complex issues that could impact the financial consequences of a divorce.
If you wish to seek a divorce and you believe you or your spouse have phantom income, it is advisable to retain legal counsel adept at handling significant marital dissolution matters to protect your interests. The skillful New Jersey divorce lawyers of Rigden Lieberman, LLC, are proficient at helping people achieve a fair outcome.
Phantom Income and Property Division
Phantom income in a divorce is income that is attributed to, but not actually received by, a person. It is income that counts towards taxable wages but not received in property or in wages for a person to use or spend.
Typically, a situation generating phantom income arises when a person owns interest in a pass-through entity, such as a Subchapter S corporation or a partnership. If a person owns a business and the profits from a business are not distributed to the person, these amounts will likely be considered income regardless of whether the person received the earnings or profits.
A person may choose to allow the business to retain any earnings or profits for “rainy day funds”, to increase or retain the business’s capital, or to be used toward expanding the business. Phantom income can also occur in instances in which a person receives forgiveness for debt obligations, such as when a person goes through bankruptcy proceedings or foreclosure, or when a student loan is forgiven.
Regardless of the reason phantom income is generated, it constitutes income for the purposes of calculating a person’s gross income in divorce cases. In New Jersey, which is an equitable distribution state, there is no case law defining what happens with phantom income for support or equitable distribution purposes.
Phantom income, like any other asset, will be divided in divorce cases in a manner the court deems just. Factors that the court weighs in order to determine what constitutes a just division includes each party’s gross income and earning potential. Thus, it is important for people who are assessed phantom income to speak with an attorney at Rigden Lieberman, LLC regarding the measures they can take to prevent this kind of income from being counted against them.
Impact of Phantom Income on Alimony and Support Obligations
Phantom income in a divorce can impact alimony and child support obligations. A judge in New Jersey will consider a person’s gross monthly income in determining an appropriate amount of alimony and child support. As such, if a person has phantom income, it can affect the obligation imposed on the person.
For example, say that a spouse owns a pass-through entity and receives a salary of $50,000 from the business. If the revenue of the company was $250,000 more than the company’s expenses, there would be a net profit of $250,000.
The business-owning spouse can decide to keep the net profit in the business such that he never personally received that $250,000. The additional income may be needed by the business to purchase capital assets, such as new equipment, or is needed as working capital, or to pay for future growth of the company.
So, the business owning spouse will only want his $50,000 salary to be considered for issues such as alimony and child support, while the other spouse will want to include the additional phantom income and argue the other spouse earns $300,000 a year.
The net income of the business may be decreased by expenses that were not incurred in the year in which the expense is reported, such as depreciation expense, which arguably artificially decreases the net income being that a spouse receives from their business.
So, phantom income can have a significant impact on a spouse’s ability to pay spousal support or child support, which can have lasting effects on the financial stability of that spouse for years.
Confer With a Knowledgeable Divorce Lawyer in New Jersey
All income is relevant in a divorce, including phantom income. If you are considering ending your marriage, an attorney can advise you regarding the possible ramifications that any phantom income may have on the financial aspects of a divorce.
At Rigden Lieberman, LLC, we take pride in helping people navigate the financial and emotional complexities that come with a divorce, and we will work hard to help you seek a fair outcome.
We represent people in divorce cases in Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, and Salem Counties. You can reach us at 856.291.9777 or via our form online to set up a meeting.