Financial Issues

Unreported Income and Hidden Assets
Tax Consequences: Filing Jointly; Married, filing separately; The effect of alimony and child support; Transfers of Property

Unreported income & hidden assets

If you suspect that your spouse may attempt to hide assets, it's best to start investigating your household and business finances before initiating divorce proceedings. Make copies of important documents such as tax returns from the past several years, bank account statements, pay stubs and any other documents that reflect joint assets or debts. Keep copies of these documents outside the home if you're still living with your spouse or partner. Also, as a precautionary measure, you might want to open a separate savings account in your name only. If your spouse hides assets, you may find yourself in need of a nest egg. Down the line, you may have to relinquish some of your savings to your spouse but having a little extra cash on hand may ward off a crisis in the wake of your divorce.

Unreported income and hidden assets are often alleged in divorce proceedings. The process of finding and proving unreported income or hidden assets is often one of the most difficult assignments of a forensic professional, and the costs must be weighed carefully against the potential benefits.

Techniques Used to Find Unreported Income and Hidden Assets

Look at the lifestyle Is there is a disparity between the lifestyle and the reported income? If nothing seems to justify the lifestyle in excess of the reported income (such as borrowed money or a recent inheritance), then there is a good possibility that unreported income is funding the lifestyle.
Look at the expenses of the business
Look at the cash flow How does the money come in and who receives it?
Look at the business operations It is essential to understand how the business is run, how often the owner comes to the business, what is his relationship with his employees, etc.

Gray areas include (and should be considered)

Income earned by spouse versus cash flow available
undistributed income in the business (used to enhance the business)
too much money is being taken out of the business (oftn due to shareholder loans)
net corporate income
pension contributions
deferred compensation
stock options

Look at Divorce and Dividing a Small Business

TAX CONSEQUENCES

A couple's tax status is affected both during and after the divorce. Separated spouses who were legally married as of December 31 of a tax year have the option of filing tax returns either jointly or as married filing separately.

Filing jointly:

Separated spouses who file tax returns jointly can share in any exemptions, deductions or credits. For example, spouses who file jointly can share the child dependency exemption, earned income credits, and spousal IRA contributions. Each spouse, however, will share equally in any liability for tax fraud or penalties, regardless of which spouse incurred those debts.

Married filing separately:

Separated spouses who file tax returns separately avoid any liability for tax fraud or penalties of his or her spouse. A spouse who has his or her children in the home more than 50 percent of the time and who is responsible for more than 50 percent of the cost of maintaining the custodial household may receive significant tax savings by filing as a head of household.

The effect of alimony and child support on taxes

Alimony that is an obligation resulting from a court ordered divorce decree or separation agreement is considered taxable income to the receiving spouse, and a deductible payment to the paying spouse, unless the couple agreed otherwise in their written divorce or separation agreement and pay taxes accordingly.

Because it is considered a payment for the benefit of the child, child support is not considered "income" to the custodial parent, nor is it "deductible" to the paying parent.

A parent who has custody of his or her child more than 50 percent of the time is considered by the IRS to be the custodial parent and eligible for a dependency exemption. Spouses who have joint custody (a 50/50 split of time) do not qualify for this exemption under IRA regulations.

It may be advantageous, then, for spouses to designate a 49/51 percent custody split within their divorce decree. Spouses with more than one child sometimes split the award of 51 percent custody of their various children between spouses. In addition, a custodial parent can waive his or her right to the exemption by filling out IRS Form 8332.

Transfers of property

A transfer of property as part of a divorce settlement is not taxable at the time of the transfer, but is subject to capital gains tax at the time it is sold. The capital gains tax is assessed on the increase in the property's value from the time of its original purchase. Special tax code provisions allow some married couples to defer and limit up to $500,000 in capital gains on their principal marital residence within the year of their divorce and home sale.

See How to figure out taxes/deductions at ehow.com

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