Phantom Income in a Divorce in Arizona: Understanding the Concept

Thu 4th May, 2023 Arizona Alimony and Spousal Maintenance

Divorce is a complex and emotional process that requires individuals to deal with various financial and legal issues, including property division, spousal support, and child custody.

One of the most challenging aspects of divorce is determining the income of each spouse, which can significantly impact the final settlement amount.

However, in some cases, divorcing couples may face a confusing and often overlooked concept known as phantom income.

In this article, we will explore what phantom income is, how it can impact a divorce settlement in Arizona, and what steps you can take to protect yourself.

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Understanding Phantom Income in an Arizona Divorce

Phantom income is a term used to describe income that is not actually received in cash or physical assets but is still subject to taxation.

Phantom income is income that is taxable but not yet received by the person being attributed the phantom income.

For example, let’s say a spouse owns a pass though income business, like a subchapter S corporation. Let’s also assume the spouse receives a salary of $100,000.00 from the business as a salary and that the revenue of the company was $150,000.00 more than the company’s expenses resulting in net profit of $150,000.00.

Let’s also assume the spouse who owns that company leaves that net profit in the business such that he never personally received that $150,000.00 because, for example, that additional income is needed by the business to purchase capital assets set as new equipment, vehicles, computers and the like, or is needed as working capital, or is needed by the company to pay for future growth of the company.

How Phantom Income Can Affect a Divorce in Arizona

How Phantom Income Impacts a Divorce in Arizona.

As you can see, the concept of phantom income in an Arizona divorce can pose some serious problems in the above example because the business owning spouse will only want his $100,000.00 salary to be considered for issues such as spousal maintenance and child support while the other spouse will want to include the additional phantom income and argue the other spouse earns $250,000.00 a year for purposes of spousal maintenance and child support.

As another example, 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 his or her business.

Phantom income, therefore, can have a significant impact on a divorce settlement, primarily when dealing with assets such as businesses, investment properties, and stocks.

As you can see, the concept of 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.

Dividing Phantom Income as Community Property

In Arizona, property division follows the principle of community property laws, which states that all assets acquired during the marriage are marital property and subject to equal distribution. As such, any phantom income generated by marital assets may also be subject to division.

However, the calculation of phantom income can be complex.

How to Protect Yourself from Phantom Income in a Divorce

If you are going through a divorce in Arizona and are concerned about phantom income, there are steps you can take to protect yourself.

First and foremost, it is essential to work with an experienced divorce attorney who understands the concept of phantom income, who can identify it, and who can help you navigate the complexities of property division, spousal support, and child support.

It is also crucial to have a clear understanding of the assets involved in the divorce and any potential phantom income associated with those assets. This may require the assistance of a financial expert, such as a forensic accountant or a business valuation expert, who can help identify any hidden sources of income or explain why the phantom income should not or cannot be paid to the business owning spouse.

Finally, it may be necessary to negotiate a settlement agreement that accounts for phantom income and its potential impact on the divorce settlement. This may involve negotiating spousal support payments, property division, or other financial arrangements that adequately address the phantom income issue.

Conclusion

Divorce is a challenging process that requires individuals to deal with a wide range of financial and legal issues.

Phantom income is a concept that is often overlooked but can have a significant impact on a divorce settlement in Arizona.

Understanding what phantom income is and, more importantly, having a divorce attorney who knows what phantom income is and how to properly address it, can have a huge impact on the outcome of your divorce.

If you are facing a divorce and need assistance navigating the complexities of property division and spousal support, contact a qualified divorce attorney today. With the right legal guidance, you can ensure that your rights are protected and that you receive a fair settlement that properly addresses the issue of phantom income.

If you need information about Arizona alimony and spousal maintenance laws, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona alimony and spousal maintenance attorneys have decades of combined experience successfully representing clients in divorce cases in Arizona.

Our family law firm has earned numerous awards such as US News and World Reports Best Arizona Family Law Firm, US News and World Report Best Divorce Attorneys, “Best of the Valley” by Arizona Foothills readers, and “Best Arizona Divorce Law Firms” by North Scottsdale Magazine.

Call us today at (480)305-8300 or reach out to us through our appointment scheduling form to schedule your personalized consultation and turn your Arizona alimony or spousal maintenance case around.

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