If you think your spouse has hidden money secrets, tax returns will show red flags

  • Whether your spouse is holding a secret brokerage account or increasing federal tax withholding to hide income, income tax returns offer a treasure trove of evidence.
  • Sniffing out an affair? Tax returns, bank statements and credit card statements will show you the red flags.

Darla Mercado, CNBC

Few people would voluntarily overpay the IRS by hundreds of thousands of dollars, but one retired accountant did exactly that in a bid to hide money from his wife.

The CPA behind this creative scheme was preparing for a divorce, said Peggy L. Tracy, a certified financial planner and owner of Priority Planning in Wheaton, Illinois.

42 PHOTOS
States where Americans pay the highest in state income taxes
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States where Americans pay the highest in state income taxes

California

State income tax: 1% to 13.3% 

Maine

State income tax: 5.8% to 10.15%

Oregon

State income tax: 5% to 9.9%

Minnesota

State income tax: 5.35% to 9.85%

Iowa

State income tax: 0.36% to 8.98%

New Jersey

State income tax: 1.4% to 8.97%

Vermont

State income tax: 3.55% to 8.95%

Washington, DC

State income tax: 4% to 8.95%

New York

State income tax: 4% to 8.82%

Hawaii

State income tax: 1.4% to 8.25%

Wisconsin

State income tax: 4% to 7.65%

Idaho

State income tax: 1.6% to 7.4%

South Carolina

State income tax: 0% to 7%

Connecticut

State income tax: 3% to 6.99%

Arkansas

State income tax: 0.9% to 6.9%

Montana

State income tax: 1% to 6.9%

Nebraska

State income tax: 2.46% to 6.84%

Delaware

State income tax: 2.2% to 6.6%

West Virginia

State income tax: 3% to 6.5%

Georgia

State income tax: 1% to 6%

Kentucky

State income tax: 2% to 6%

Louisiana

State income tax: 2% to 6%

Missouri

State income tax: 1.5% to 6%

Rhode Island

State income tax: 3.75% to 5.99%

Maryland

State income tax: 2% to 5.75%

North Carolina

State income tax: 5.75%

Virginia

State income tax: 2% to 5.75%

Oklahoma

State income tax: 0.5% to 5.25%

Massachusetts

State income tax: 5.1%

Alabama

State income tax: 2% to 5%

Mississippi

State income tax: 3% to 5%

Utah

State income tax: 5%

Ohio

State income tax: 0.495% to 4.997%

New Mexico

State income tax: 1.7% to 4.9%

Colorado

State income tax: 4.63%

Kansas

State income tax: 2.7% to 4.6%

Arizona

State income tax: 2.59% to 4.54%

Michigan

State income tax: 4.25%

Illinois

State income tax: 3.75%

Indiana

State income tax: 3.3%

Pennsylvania

State income tax: 3.07%

North Dakota

State income tax: 1.1% to 2.9%

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The accountant's wife — then Tracy's client — became suspicious after noticing her husband didn't file the couple's tax returns for two years. After asking the IRS for a history of tax payments made, Tracy uncovered a surprise.

"His tax bill every year was about $40,000, but we found out he was putting away hundreds of thousands in estimated payment vouchers and just leaving the money there," Tracy said.

"He was parking the money with the IRS," she said.

31 PHOTOS
31 tax credits and deductions that could save you thousands
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31 tax credits and deductions that could save you thousands

CHARITABLE DEDUCTIONS

That higher standard deduction makes it difficult to put together enough charitable deductions to make it worth itemizing. But if you do make large contributions, the threshold for deductions has jumped from 50 percent of adjusted gross income to 60 percent. While it's too late to make charitable donations for 2018, Kibler suggests tracking down receipts for donations made throughout the year, especially of cash or goods. Giving to eligible nonprofits, religious organizations, and government organizations (such as a school or public library) are deductible. "If you dropped off a bag of clothing at a local charity or gave them $5 at the cash register of your grocery store, make sure to track these contributions so you get the highest tax benefit possible," Kibler says.

STANDARD DEDUCTION

The passage of the Tax Cuts and Jobs Act in 2017 almost doubled the standard deduction in 2018, pushing it from $9,350 for those filing as head of household to $18,000. But it also eliminated a bunch of helpful credits and deductions, including the personal exemption, which was $4,050 in 2017.

AMERICAN OPPORTUNITY TAX CREDIT

While tuition and fees deductions have dried up, the American Opportunity Tax Credit remains an option for eligible students — not grad students or long-term undergrads; it's available only during the first four years of college — with at least half-time status at an accredited school. It covers all of the first $2,000 in expenses and 25 percent of the next $2,000 (for a total $2,500). Schools will send students a 1098-T showing the amount paid last year in tuition and fees, but even expenses including books, supplies, and equipment such as computers can be offset. If the 1098-T does not max out the allowed credit, hold onto those receipts for supplies.

LIFETIME LEARNING CREDIT

This is the tax credit for the older student. Anyone taking classes at an eligible educational institution to acquire or improve job skills is eligible, even students taking just one class well after four years of undergraduate education. There are limits: Students are credited for only 20 percent of $10,000 in expenses ($2,000 is the maximum), though it can be applied to tuition, fees, books, supplies, and equipment. Individuals with an adjustable gross income between $56,000 and $66,000 (or between $112,000 but less than $132,000 for married filing jointly), will get a reduced amount. If it's over those thresholds, you can't claim the credit at all.

MORTGAGE INTEREST DEDUCTION

If you bought a home and had the mortgage in place before Dec. 15, 2017, you are still eligible to deduct interest on up to $1 million in mortgage debt. If you happened to sign on that date or later, though, your threshold drops to $750,000.

 

PREMIUM TAX CREDIT

If you or your family have health insurance from a government-run marketplace built through the Affordable Care Act, you may be eligible for this credit. Income is limited to up to $48,560 for individuals and up to $100,400 for a family of four, but the credit is usually equal to the cost of the second-lowest silver plan. Taxpayers can get this credit in advance to offset monthly premium bills, but claim too much and it must be paid back when filing. Those who get too little can claim the remainder when submitting returns.

DEPENDENT CARE CREDIT

If a child does not qualify for the Child Tax Credit because they are over 17, they may still be eligible for a $500 credit under new tax laws. The credit also applies for dependents who are elderly or disabled.

CHILD TAX CREDIT

Those who took advantage of the child tax credit in 2017 could claim a $1,000 credit on their income tax return for each child under 17 who qualified. In 2018, that doubles to $2,000 per qualifying child. The credit was also nonrefundable in previous years, but can now be refunded to 15 percent of earned income over $2,500, or up to $1,400. To qualify, children have to be 16 years or younger on the last day of 2018, be related to you, claimed as a dependent, be a documented U.S. citizen or resident, have lived with you for half of the tax year (though absences related to school, vacation, military service, and medical care are exempt) and must not provide more than half of his or her own support. The credit phases out for married taxpayers filing jointly with an income of $400,000 (or $200,000 for all other taxpayers).

EARNED INCOME TAX CREDIT

The Earned Income Tax Credit is for low- and moderate-income taxpayers with "earned income" such as wages, salaries, or self-employment pay (but not Social Security, unemployment, or investment income). The limits are strict, ranging from $15,270 for a single person with no children to $54,884 for a married couple with three children or more. The credit's value is worth $519 to $6,431 depending on filing status and number of dependents, but requires recipients to have less than $3,500 in investment income for the year.

IRA DEDUCTION

Whether it's through an employer or private plan, a traditional Individual Retirement Arrangement funded with pretax money — unlike a post-tax Roth IRA — is deductible up to a certain limit. Even if an account is opened and funded in 2019, any contributions made before the tax-filing deadline can be credited to the previous year. For 2018, the maximum contribution is $5,500 (or $6,500 for those 50 or older). There are also deduction limitations depending on the taxpayer's income and access to an employer-sponsored retirement account.

STUDENT LOAN INTEREST DEDUCTION

Students can still deduct up to $2,500 for interest paid on student loans — but get less if median adjusted gross income exceeds $65,000 ($135,000 for joint returns) and nothing if it's $80,000 or more ($165,000 or more for joint returns).

CREDIT FOR THE ELDERLY OR THE DISABLED

Taxpayers 65 or older — or younger but retired or on permanent and total disability — may be eligible for a credit. Taxable income must be below $17,500 (or $20,000 if married and filing jointly) and nontaxable Social Security, pension, or disability benefits must be below $5,000. If both partners qualify and file jointly, the income limits are $25,000 for taxable income and $7,500 for nontaxable benefits. The credit itself ranges between $3,750 and $7,000.

SAVERS CREDIT

It isn't much, but the Savers Credit gives back to low- and moderate-income people who contribute to a qualified retirement account. Taxpayers can get a credit for 10 percent, 20 percent, or 50 percent of the first $2,000 contributed, depending on income and family size. To get the minimum 10 percent, the maximum allowed income is $31,500 for single filers, $47,250 for the head of a household, and $63,000 for joint filers. Also, beginning this year, beginning in 2018, if you're the designated beneficiary you may be eligible for a credit for contributions to your Achieving a Better Life Experience account for persons with disabilities.

SEP-IRA CONTRIBUTIONS

A longtime friend to small-business owners and freelancers, the Simplified Employee Pension IRA offers higher contribution limits than a traditional IRA. As their own employer, business owners and freelancers can contribute up to 25 percent of their annual income or $55,000, whichever is lower. As with a traditional IRA, contributions made before the tax-filing deadline (without an extension) can be applied to the previous year.

MORTGAGE INTEREST CREDIT

Taxpayers who get a Qualified Mortgage Credit Certificate worth up to $7,500 from a local or state government may be able to claim the Mortgage Interest Credit. The home must be the taxpayer's primary residence, and interest payments can't go to a taxpayer's relative. The credit is worth up to $2,000, and unused portions may be carried forward to the following year.

MEDICAL EXPENSES DEDUCTION

You can get a larger deduction for medical expenses in 2018 by doing absolutely nothing. Until recently, taxpayers 65 years or older could deduct total medical expenses that exceeded 7.5 percent of their adjusted gross income. Even married couples that included one person 65 or older were eligible, but younger, single taxpayers could deduct only medical expenses that exceeded 10 percent of their AGI. For 2017, that threshold was slated to jump to the 10 percent of AGI for everyone, including those over 65; the recent tax reform set the threshold for everyone at 7.5 percent of gross income and made it retroactive to 2017. It stays in place for 2018, but will go back to 10 percent of AGI in 2019.

SOLO 401(K) CONTRIBUTIONS

Unfortunately, taxpayers can't just set one of these up before the tax deadline and save some cash. The one-participant 401(k), or solo or self-employed 401(k), requires you to file for a federal Employer Identification Number and set up the account by Dec. 31. But once a solo 401(k) is established, taxpayers can make contributions right up to the tax-filing date in April (or mid-October, with an extension). Total contributions can't exceed $55,000, but that's still nearly four times the maximum employee contribution to a standard 401(k) of $18,500.

BONUS DEPRECIATION

If you bought new office furniture, computer servers, cranes, end loaders, cattle, trucks, or taxis for a business last year, you may be able to write off more from them than you thought. Even if you built oil derricks, warehouses, office space, or utility plants after Sept. 26, 2017, the bonus depreciation you could claim on the first year of owning those assets increased from 50 percent just a day before to 100 percent "expensing" from Sept. 27 onward. Recent tax changes also extended bonus depreciation from items bought or built new to both new and used assets. That "expensing" applies to productions (qualified film, television, and/or staged performances) and even certain fruit or nuts. The law also increased the maximum deduction from $500,000 to $1 million, with the phase-out threshold increasing from $2 million to $2.5 million.

CAR EXPENSES

Self-employed people can deduct 54.5 cents a mile driven for business purposes the previous year; the rate goes up to 58 cents in 2019. That said, detailed mileage logs are required. Writing down the miles driven (odometer readings at the beginning and end of the trip help), the date, the business purpose of the trip, and the destination should be adequate. Taxpayers can also take a 18-cent-per-mile deduction for eligible miles driven for medical purposes in 2018, up from 17 cents in 2017 (and it's 20 cents in 2019). The standard mileage rate for charitable activities is unchanged at 14 cents. Moving expenses, however, no longer qualify for a deduction.

HOME OFFICE DEDUCTION

This one is tricky, as simply working on the couch or at a kitchen table doesn't cut it. A home office has to be a dedicated space for working and meeting clients and customers. Furthermore, office-related utilities including telephone, internet, and even heat and electricity have to be parsed out separately. You can try to determine which portion of a home's expenses, taxes, insurance, and depreciation is dedicated to a home office; a simplified version multiplies the square feet of the room by $5 (if the total size is 300 square feet or smaller). That said, you can only get this deduction if you're self-employed: It disappeared for employees in 2018.

STATE AND LOCAL TAX DEDUCTION

Under tax changes, deductions for state and local taxes (property tax and sales or income tax) are capped at $10,000 from 2018 through 2025. If your total state and local taxes and property taxes are typically more than the $10,000, there's no way to increase the deduction. The new tax law prohibited prepaying 2018 state and local taxes that were not imposed in 2017.

ADOPTION CREDIT

You may be able to take a tax credit of up to $13,810 for qualified expenses paid to adopt a child in 2018. Those expenses include adoption fees, court costs, attorney fees, travel expenses (including amounts spent for meals and lodging), and readoption expenses for a foreign child. Those credits apply to adoptions of anyone under 18 years old or physically or mentally incapable of taking care of themselves. If your modified adjusted gross income is more than $207,140, the credit is reduced; those with MAGI of $247,140 or more can't take the credit.

ELECTRIC VEHICLE AND PLUG-IN HYBRID TAX CREDIT

Despite fears it would be eliminated, this credit still offers buyers of electric or plug-in hybrid vehicles up to $7,500 for the purchase. While this credit isn't going to be around forever, it's still a formidable tool for boosting sales of these fuel-efficient vehicles in spite of low gas prices and the market's hunger for less-efficient SUVs.

FOREIGN TAX CREDIT

If you paid or accrued income tax in a foreign country or U.S. possession in 2018, you can use it as a credit against U.S. income tax. If you already exclude foreign earned income, foreign housing costs, foreign possessions, or income from Puerto Rico exempt from U.S. tax, you aren't eligible. Also, your foreign tax credit can't be more than your U.S. tax liability multiplied against a fraction made up of taxable income from outside the United States and total taxable sources.

HOME SALE EXCLUSION

Most people who sell a home know that, if they've sold at a gain, they may exclude up to $250,000 of it if single or $500,000 if married filing jointly. Granted, you actually had to live in that home for two of the past five years (military, foreign service, and intelligence personnel are exempt). What most homeowners don't realize is that the gain isn't only on the sale price of the home, but on improvements made, real estate agent sales commissions, closing costs, recording fees, and survey fees. Kibler suggests keeping clear records of all of it in case of an audit and to keep a big chunk of the gain tax-free.

FOREIGN EARNED INCOME EXCLUSION

If you live in a foreign country for at least 330 full days out of the year, you can have up to $104,100 of your salaries, wages, professional fees, and other amounts you get as an employee excluded from federally taxable income. You may also exclude amounts your employer pays for rent, furniture rental, parking, or other items.

HSA CONTRIBUTION LIMITS

The IRS will allow taxpayers to make tax-free contributions and withdrawals from Health Savings Accounts as long as they go toward qualifying medical expenses. High-deductible health plans — with premiums ranging between $1,350 and $6,650 for singles and $2,700 and $13,300 for families — allow taxpayers to contribute up to $3,450 for single filers or $6,900 for families to HSAs without any tax implications.

NONBUSINESS ENERGY TAX CREDIT

The Nonbusiness Energy Property Credit covers materials that meet the efficiency standards of the Department of Energy. This includes home insulation, exterior doors, exterior windows and skylights, some roofing materials, electric heat pumps, various water heaters, central air conditioning, biomass stoves, furnaces, boilers, and advanced circulation fans. You can claim 10 percent of the minor improvements or 100 percent of the big ones, but you'll get only a maximum $500 credit for all years of improvements combined. It also sets credit limits for windows ($200), boilers ($150), fans ($50), and bigger jobs ($300).

RESIDENTIAL RENEWABLE ENERGY TAX CREDIT

If you're thinking about going solar, installing a small windmill, looking into geothermal heat, or experimenting with fuel cells, there's tax incentive to do so. You can get a 30 percent rebate on any of the above, but act quickly. If you don't install it by the end of 2019, the rebate drops every year until 2022.

CASUALTY, DISASTER AND THEFT LOSSES

In previous years, a taxpayer could get a deduction for any mishap that occurred in their home. But starting in 2018, the damage must have occurred during a federally declared disaster for a taxpayer to get that same deduction. This deduction may return in full in 2025, but for now it's limited to disaster areas.

WORK-RELATED EDUCATION

The self-employed, including those with freelance income, can write off educational expenses for workshops, webinars, books, or other material that maintain or improve skills. While educational expenses to meet the minimum requirements of a trade or business — or related to getting into a new line of work — don't qualify, refresher courses, courses on current developments, and academic or vocational courses would. The deduction is the amount by which qualifying work-related expenses is greater than 2 percent of adjusted gross income.

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In all, the retired CPA made more than $500,000 in extra tax payments, pulling the money from a brokerage account.

"His theory was that when he got divorced, he'd be single, he'd file his back taxes and get the money out," said Tracy. "We caught him and did the back tax returns, so it was about $200,000 in tax refunds for both."

When it comes to uncovering a spouse's hidden assets and income, your tax return just might be the key to chasing down that cash and getting an equitable split in a divorce.

Here's what you need to know.

Take apart your 1040

Your individual income tax return and the forms you need to prepare it have more than just the details on the amount you and your spouse earned in a given year.

Form W-2, for instance, contains data on how much your spouse earns, the amount they save in workplace plans and what they're withholding in income taxes.

The cleverest of divorcees may stretch the truth about their after-tax income by throwing more money into a 401(k) plan, a deferred compensation plan or a health savings account — a tax-advantaged account you can use to pay for qualified medical expenses.

High deferrals into these and other savings accounts at work reduce take-home pay. Soon-to-be exes try to use this to argue for reduced alimony and child support obligations.

"They'll say they don't have any money, but they're paying this much into their 401(k) plan so that it lowers their support payments," said Christy Bastian, CPA and president of FVL Consultants in Marco Island, Florida.

"Looking at the paystub will tell you if there are undisclosed assets," she said. "It could indicate there's a retirement account." Such a find can be valuable in a divorce, as assets in a 401(k) can be divided through a qualified domestic relations order.

Secret accounts

Here are two tax forms that might help you uncover hidden assets and secret spending: Schedule B, which contains details on interest and dividends, and Schedule D, which addresses capital gains and losses.

Both forms are a necessary part of filing your income tax return.

"Sometimes we find accounts because you were stashing away money, and there might be an interest income statement that comes in," said Tracy.

"As for capital gains and losses, are you taking money out of a brokerage account and not reinvesting it?" she asked.

You should also keep an eye out for Form 1099-R, which taxpayers receive when they've made distributions from retirement accounts.

"People don't want to look at their financial accounts on a monthly basis," said Tracy. "It gives people an opportunity to hide money because nobody is watching."

Risky business

Entrepreneurs can be creative when it comes to squirreling away cash and hiding affairs.

"Sometimes they funnel money to a company that they set up innocently years ago when everything was fine," said Philip Segal, an attorney and founder of Charles Griffin Intelligence in New York.

In one case, a husband with a company in New York decided to form a second entity with the same name in Florida. His wife, Segal's client, suspected that her husband was having an affair with another woman in that state.

A search of corporate and business entities in Florida turned up an address for the business — which happened to correspond with the other woman's apartment, Segal said.

Though the company was listed at her address, there was no evidence the company did any business in Florida, he said.

Tax returns linked to the business can also spell out cash flow details, including unusual spending patterns.

"If you're in the midst of a divorce, you have document discovery and you can get into the tax records," said Segal. "Or if you have the same accountant, you can see the business tax records."

Sighting red flags

Watch out for the following:

● Your spouse's spending habits change: One of Tracy's clients had a cheating spouse who would buy both his mistress and his wife the same holiday gifts — including two furs. It wasn't immediately obvious because the credit card statement would show only one charge, Tracy said.

In another case, one of Tracy's clients socked away $30,000 over time just by taking out additional withdrawals at the cash register when buying groceries. She put the money in a safe deposit box.

● You're given an allowance: Your spouse might give you enough to spend and dissuade you from looking at the household's checking accounts. "If you're given a limited budget and you don't get access to financial information, that's a clear red flag," Bastian said.

● Your spouse is transferring money across different accounts: Cash going across different personal checking accounts or between different business accounts is fishy. Don't forget to keep an eye on those brokerage accounts, where spouses could take out large sums of cash.

"It's getting your head out of the sand and going with your spouse to the planner if you have one for yearly review," said Tracy. "Nobody should do a review without both spouses there, explaining the finances."

SEE ALSO:
Why secret cash payments to your nanny could backfire
Getting zero back from the IRS might be a good thing
Five ways to jump-start your tax return

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This article originally appeared on CNBC.

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