The Financial Affidavit is the foundation from which all divorce settlements are built. The Financial Affidavit is used to determine child support, spousal support (also called alimony), and the separation of assets and liabilities to reach equitable settlements. In Massachusetts, this form wants to know your weekly income, weekly deductions from salary, weekly expenses, lawyer fees, and assets and liabilities. What is weekly income? Is it what you earned this week? Is it okay just to pull out your pay stub this week and copy down those numbers? Maybe! Do you receive exactly the same paycheck every week for 52 weeks?
If you can answer yes to that, then there is a good chance that information might be right. However, if your paycheck varies during the year, you need to look a little further for information. Some factors to consider – do you work different hours each week? work overtime? get bonuses? do seasonal work? collect unemployment part of the year? get tips? Self-employed? If you are just looking at your pay stub and are in some of the above situations you may be under reporting or over reporting your income. Take the case of the union carpenter who works a job for 5 to 20 weeks, gets some overtime, and when the job is finished collects unemployment until the next job begins. When filling out his financial Affidavit, he used this weekâ€™s pay stub. Multiplying that number by 52 weeks showed he was earning $65,000 a year which was not a true figure. He actually grossed about $45,000. Or the seasonal bartender at the Cape who works the tourist months and collects unemployment the rest of the year. She listed her weekly income as the amount she received this week for unemployment. Certainly that multiplied by 52 weeks is understating her income. What if you work on commission? Or you are self-employed? You need to find an AVERAGE WEEKLY INCOME.
Take the previous 52 weeks and get your average. Your weekly income is not just from your job. What about perks of your job? Company car, expense accounts which include personal use i.e gasoline, season tickets to ball games or concerts. Do these add value to your lifestyle? Then they need to be included. Other sources also include interest & dividends, trusts, annuities, pensions, retirement funds, social security, disability payments, unemployment, public assistance, rental income, child support, alimony, All these need to be averaged to get a weekly amount. Rental income is an interesting source. If you have rental income and on your tax return, you claim a loss every year – does this mean you have a negative amount to report on the financial Affidavit? No, your tax return reports income and expenses differently than what you actually have in your hand and what money you actually spent. Therefore, care needs to be taken when figuring this amount. Then there are the weekly adjustments to your income. These include your federal and state income tax withholdings, F.I.C.A. (social security), Medicare tax, Medical insurance, and Union dues. These are considered mandatory and/or necessary adjustments. Will just looking at your pay stub give you the correct figures? Probably not! Take your federal withholdings – If you claim zero with your employer but really claim four on your tax return, so that you can get a bigger refund – that tax refund needs to be included in your income – either adding it to your income or adjusting your deductions. Likewise, if you always have a balance due, that liability should adjust your weekly income. What about your F.I.C.A. payments – thatâ€™s based on a percentage of what you earn. However, if your income for the year is over $87,000 in 2003, then your social security is limited. If you are filling out your financial Affidavit before you reach that level in income, you will be overstating the amount you pay into the system, likewise if it after the date, you might mistakenly not include it at all. Medical Insurance is not mandatory but is definitely necessary likewise you need to pay your union dues to keep your job.
Other adjustments you might see on your pay stub – Credit Union (loan repayments or savings), direct deposits for savings or retirement accounts, 401K plans, contributions to United Way, uniforms. Most of these are optional and could have the amounts adjusted. Your tax preparer will advise you to contribute as much as you can afford to put into your 401K plan however it is not a mandatory or a necessary expense. Weekly expenses – What bills do you have that come in every week? Most billing is done on a monthly basis. However, you also have some that come annually, bi-annually or quarterly and others that have a minimum amount to pay and are adjusted until it is paid off. If the monthly bill is the same each month, like your mortgage and cable bill, then you can divide that number by 4.3 to come up with a weekly expense. Just dividing by 4 weeks will overstate your expense. If the monthly bill changes each month, like your electric bill or your phone bill, then you need to add up the previous 12 months and divide by 52. Likewise for the annual, semi-annual, or quarterly bills like your home owners insurance. For the bills that come as the service is used, like your oil bill or doctors bills, again add up the total spent in the last 12 months and divide by 52. If you pay your gas with your credit card and also make a credit card payment each month can you take both expenses as weekly expenses? No, all the expenses on your credit card should be reported in the category for which they are spent on. Only the interest paid on the credit card would be an additional expense. If you had a large balance due on a credit card that would be put in your list of liabilities. You buy groceries every week or spend money to go out to eat. Again, average this amount for the previous 12 months. Child support is based on your income before expenses. Spousal support looks after weekly expenses and makes consideration for need of one party and the ability to pay from the other party. Also included in the computation are the length of the marriage, age & health of each spouse and their lifestyle together. Then we have assets. What are assets? This is anything you have that has a cash value. We have liquid assets. These are your cash on hand, the money in your checking and savings accounts, money market accounts, cd’s. savings bonds. We have investment assets – stocks, bonds, mutual funds, and collectibles. Retirement plans – IRA’s, 401Kâ€™s, Profit Sharing, etc. Tax deferred annuities.
The cash value of your Life Insurance. Pension Plans – what is the present value and what will be the value at the time of retirement. These 2 very important figures are often given a value without real verification. Often the pension is used to wash the value of the house when assigning assets. It may not be the most beneficial move depending of a variety of other factors. But without obtaining the true values, the impact of this decision might not be apparent until many years later. And then there is real property. This is any houses or buildings and land that you own either separately or jointly. Who is entitled to this property is another discussion. But for the purposes of the Financial Affidavit, all property is included. This includes the marital home, second homes, vacation homes, rental and business property, Also on your Financial Affidavit, your automobiles, boats, recreational vehicles, equipment, tools, gun collections, jewelry, paintings, household furnishings.
If it has a value, it should be listed. If you own a business and the business has a value – it could be sold, the value of the business must also be included. Most of these items will need to be appraised by a professional. After obtaining a FMV (fair market value) for your properties, it is also important to know your basis or cost in these items. The Financial Affidavit asks for your FMV and then any debt against to obtain your equity in the item. It does not ask for the basis. This is important because if that item needs to be sold, there may be tax consequences and when determining a settlement, taxes should be figured into the formula. An example might be a vacation home, which presently has a FMV of $150,000. You have $50,000 left on a mortgage so your Equity is $100,000.
However, the IRS doesn’t care about Equity – what they are looking for is gain. You received this property in your settlement, but you need to sell it to pay your bills. When you purchased the house 20 years ago, you paid $10,000 and over the years you put in $20,000 worth of improvements. In selling the house, you have closing costs and commissions paid to the realtor. Let’s say that was $10,000. For tax purposes the sale of the house is $140,000 ( $150,000 minus selling costs of $10,000). Your basis is $30,000 ($10,000 original cost plus $$20,000 improvements). Your taxable gain is$110,000. State & federal income tax would be approximately $28,000. Therefore you end up with $62,000 in cash ($150,000 sale price minus $10,000 selling costs minus $50,000 mortgage minus $28,000 tax). And lastly, the Financial Affidavit asks for your liabilities. These are any debts you have accumulated up to the time you started your divorce proceedings. This includes mortgages, loans, car payments, credit cards, any thing you owe money for and are making or intend to make payments for. Each spouse fills out his or her own Financial Affidavit. From that point, the negotiations begin. If the information on these forms is not accurate, how can equitable settlements be made?
The Financial Affidavit is the foundation for determining Child Support, Spousal Support, and the division of assets and liabilities to achieve an equitable settlement. If the foundation is cracked with misinformation, how will it stand the test of time? The settlement needs to be equitable not just for today but for the future as well.