Phantom Income in Divorce

While people are generally aware that each spouse’s income is an important factor in determining property division and support obligations in a divorce, they often do not understand the nuances of what constitutes income. For example, many people have never heard of phantom income in a divorce, and are unaware of how such income could impact the financial consequences of ending a marriage. 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 complex marital dissolution matters to protect your interests. The skillful Dallas divorce lawyers of McClure Law Group are proficient at helping people fight for a fair outcome, and we will gather any available evidence to help you strive for a just result.

Phantom income in a divorce is income that is attributed to, but not actually received by, a person. In other words, phantom income counts towards a person’s taxable gross wages but is not available for a person to use or spend. Typically, a situation generating phantom income arises when a person owns interest in a business. For example, if a person receives earnings or profits from a business that 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 self-insurance purposes, 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 Texas, community property, which is property owned by both spouses, is divided in divorce cases in a manner the court deems just. Factors a court weighs in determining what constitutes a just division include each party’s gross income and earning potential. Thus, it is important for people who are assessed phantom income to speak with an attorney regarding what measures they can take to prevent this kind of income from being counted against them.

Phantom income in a divorce can impact alimony (or spousal maintenance as it is called in Texas) and child support obligations as well. Although in Texas the courts will only grant spousal maintenance in limited circumstances, the courts often consider a person’s gross monthly income in determining an appropriate amount of spousal maintenance. As such, if a person has phantom income, it can affect the obligation imposed on the person. Similarly, child support obligations are determined in part by the monthly resources of the parent paying support. If a person has phantom income, then his or her child support obligation will likely be higher than it would be absent the phantom income. While a parent may be tempted to argue that the courts should disregard phantom income in determining child support obligations, the Texas courts have specifically held that some types of phantom income should be included as part of a person’s income for determining an appropriate amount of child support.

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 McClure Law Group, 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 Dallas, Richardson, Garland, Irving, Fort Worth, Rockwall, McKinney, and Frisco. We also assist people with other family law matters in cities throughout Dallas, Denton, Grayson, Rockwall, Collin, and Tarrant Counties. You can reach us at 214.692.8200 or via our form online to set up a meeting.