First, when getting a divorce, it is extremely important to consult with a CPA or even a tax lawyer if necessary to understand your options and the implications of various financial matters. In this article, I am going to address issues that you should be aware of so you can investigate further with the CPA, your lawyer, and your spouse to have the best outcome possible.
Most people that are married file their taxes “married filing jointly”. There are lots of benefits the government gives you for this status generally causing the overall payment/liability to the government to be the lowest possible for the family. You can file “married filing jointly” if you are legally married on the last day of the tax year. If you get legally divorced on December 31, 2015 you cannot file with this status for your 2015 taxes. If you wait until January 1, 2016 (or January 2, 2016 as the courts are closed on New Year’s) to divorce, you can file jointly for the 2015 tax year. There is no partial year joint/single tax treatment
If you file jointly with your spouse and you lived together for the last year, you and your spouse have joint liability for any tax problems. Each of you can be held 100% responsible. It is really, really hard to limit or eliminate your liability if you and/or your spouse committed tax fraud (even if you earned no money, and even if it wasn’t your fault). It is possible to be relieved of some or all of the liability through 1) the innocent spouse doctrine, 2) separation of liability, or 3) equitable relief, as described below, but it is not easy so be careful.
If you know or believe your spouse is not reporting income properly and you file jointly, you are on the hook and be prepared to deal with the consequences. Alternatively, if you don’t want to deal with this problem and you are still legally married, you can and probably should file “married filing separately”, but please check here with your CPA who can review your exact facts. When filing “married filing separately” you receive less credit from the IRS for this type of filing. You might pay a few more bucks, but you won’t be liable for your spouse’s fraudulent filing. If parties file “married filing separately”, generally the tax rate is higher, exemption amounts are half, you can’t take child and dependent care credits, you can’t take earned income credits, education credits or deductions for student loans. Notwithstanding these losses, it is usually better to avoid tax fraud problems.
If you are unmarried or “considered unmarried” (i.e. divorced or legally separated in some states) the last day of the tax year and you pay more than half the cost to keep up a home and you have a qualifying person living in the home more than half of the year, you can claim “head of household” which is a more favorable filing status. If you live with your girlfriend or boyfriend and support this person, this does not entitle you to “head of household” status. You might be able to claim an exemption, but not “head of household”.
One of the serious issues in divorce is tax fraud or “improper reporting” where one party does not properly declare income and the other spouse is on the joint tax return, and thus would have liability for improper reporting. There are a few ways to be totally or partially relieved of this debt.
First, there is the innocent spouse doctrine. According to the IRS publication for 2014, you can be relieved of responsibility for paying tax interest and penalties if your spouse improperly reported on a joint return if you can show that when you signed the joint return, you did not know and had no reason to know that the understated tax existed. Knowledge or reason to know is based on the facts including, but not limited to, the nature of the erroneous item, the amount of the erroneous item, the financial situation of you and your spouse, your educational background and business experience, the extent of your participation in the activity that is erroneous, whether your failure to ask about problems was reasonable, and whether the erroneous item was a departure from past returns. There also may be relief from liability even if you have actual knowledge if you were the victim of spousal abuse or domestic violence before signing the return, and because of that specific abuse you did not challenge the return.
Other relief is separation of liability if you are no longer married to or are legally separated from your spouse, and you didn’t live with your spouse for twelve months prior.
Finally, parties can sometimes obtain equitable relief.
The current law indicates the relief from liability must be addressed within two years after the date the IRS attempts to collect the debt. So if you know there is a problem, don’t wait – there are deadlines. Get to your CPA or tax lawyer and be proactive about addressing this issue.
The rules indicated above are generalized. You should always consult with a CPA or tax advisor to analyze your financial situation. These professionals can play a critical part in the divorce process.
Tanya N. Helfand, Esq. concentrates in Family Law in New York and New Jersey. We have a free ½ hr. consultation. Tanya N. Helfand, Esq., is a Certified Matrimonial Attorney and mediator. The firm welcomes your questions and inquiries at [email protected] Everything is confidential. This article is not legal advice. Please consult an attorney or a tax specialist if you have a tax issue.