FindLaw KnowledgeBasePublished: 2011-04-27
Most tax professionals would agree that “married filing jointly” is generally the most advantageous filing status. Spouses’ incomes are combined, deductable expenses are pooled together and there are some benefits that are available only to joint filers.
While a joint return is typically how married couples file, what if you had recently become suspicious of your spouse and the source some of his or her income? What if your spouse had been making millions or even billions from a Ponzi scheme he or she was running and you did not know it? Then what if the house of cards came crashing down and the Internal Revenue Service (IRS) came looking for the unpaid tax on all of that ill-gotten money?
The premise of this story likely sounds vaguely familiar and certainly far-fetched for most couples; however, the principle is applicable to all. Even in denominations of thousands instead of millions or billions, the illegal actions of one spouse can have negative tax consequences on both spouses.
When a couple files a joint tax return, they automatically become joint and severally liable for any tax delinquencies. That essentially means that regardless of which spouse is truly responsible for the delinquency, the IRS can and will come after both spouses named on a joint return. That is true even if the couple later divorces.
Benefit of Filing a Separate Tax Return
One way of avoiding a spouse’s tax liabilities is to file a “married filing separately” return. Unfortunately, this will often result in higher taxes for both spouses. Moreover, separate filings can limit or eliminate some benefits and deductions. Nevertheless, the extra tax could be considered insurance against an even higher tax liability if something is awry and the IRS comes knocking.
If, despite one spouse’s suspicions about the other, a couple decides to file a joint return, it is wise for both to know and understand what is being claimed. Naivety is not bliss in this situation and it is wise to review any return before blindly signing. If something seems “off,” one should not sign and should consider approaching the separate filing issue (as awkward as that conversation might be).
Filing Status During a Divorce
Divorce is another time when a spouse should not be naïve about the contents of a joint tax return. Because trust is likely at an all-time low as a marriage ends, it would be wise to ask a tax professional to independently review the filings and documentation to avoid any unnecessary tax liability. The IRS allows the “innocent spouse” in few cases.
There also arises the question of how a divorcing couple should file their taxes: married filing jointly, married filing separately or single status. A couple’s marital status on December 31 governs the filing status for that entire year. If the divorce is finalized as of December 31, each spouse must file a single tax return regardless of how much of the year the couple lived together.
If a divorcing couple is still legally married on December 31, the spouses must file as married (jointly or separately). However, if a still married spouse meets the following criteria, he or she may be able to file under Head of Household status:
- Unmarried or considered unmarried (legally separated or spouse did not live in home for last six months) on December 31; and
- Paid more than half of costs to maintain home; and
- Housed a child (for whom either spouse can claim as an exemption) for more than half the year
Because each couple’s financial situation is different, each spouse must decide which filing status is most financially advantageous for them.
Other Tax Considerations in Divorce
While there is a tendency to want to negotiate and finalize a divorce quickly, each spouse should take a step back and consider the tax implications of any agreements to divide assets. Issues such as the capital gains on the sale of certain assets, alimony payments instead of child support, claiming exemptions for the children and claiming child care credits.
Seek Professional Help
Each marriage and its financial situation are unique. While filing a joint tax return with a spouse is generally the most advantageous route, there are circumstances where a spouse may need to protect himself or herself from the actions of their counterpart. Couples filing jointly will be pursued by the IRS jointly if there are taxes owed, regardless of which spouse is to blame.
During a divorce is another time a spouse should take a strategic look at what type of tax return to file and how the marital assets are going to be divided. Because all of these situations are complex, contact a knowledgeable tax and family law professional to discuss your circumstances. If you have additional tax questions, attorney Francis Grather can direct you to a qualified professional to provide sound tax advice.