Tax Debt and Divorce: Who Pays the Back Taxes?
A divorce is a complicated situation no matter how you look at it. Besides all the emotional issues you have to battle, you also have to sort through a laundry list of financial issues when trying to separate merged finances. Many married couples have joint accounts, own property that belong to both, and have been filing income taxes jointly for years. So, what happens when a couple owes back taxes and they decide to divorce?
Tax Debt Generally Follows Other Debt and Property Divisions
The general rule of thumb is that tax debt is seen in divorce proceedings as any other kind of debt. So, when your attorneys work on the divorce settlement and determine how much each party handles, tax debt is included, along with credit card bills, mortgage balances and any other debt. If property and debts are divided evenly between spouses, then your tax debt (including back taxes) is also divided evenly and each of you is required by law to pay your share. Settlements are not always equal, however, and sometimes one side will argue to pay more tax debt in order to also receive more of the share of the property.
Exceptions to This Rule
For the majority of states, property and debt are divided evenly in a divorce. However, you should note that if you happen to live in one of the following states – Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin – these states treat property and debt a little differently. In those states, the property and debt you acquire during marriage is considered “community property” and split evenly in a divorce, even if one spouse is unemployed. These states consider property and debt brought into marriage as “personal property” and this is assigned to the spouse who brought it into the marriage. Property left as inheritance or that were gifted to a spouse is not considered community property. So if back taxes were brought into the marriage in these states, the back taxes would remain the responsibility of the spouse who brought them to the marriage.
If you are not in one of those states, then the rules are known as equitable distribution laws. Property acquired during the marriage in these states belongs to the spouse who earned it. In the case of divorce, the property is divided between the spouses fairly as determined by several factors that a court will decide. These are not set rules for determining who receives what or how much. As an example, the wages of spouses can be examined or an evaluation of the distribution of domestic chores between the two such as child-rearing and maintenance of the estate. It is not unheard of for a court to decide on granting a spouse between one-third and two-thirds of the marital property.
Filing Your Taxes After a Divorce
One of the most frequently asked tax questions during or after a divorce is related to the filing. If your divorce was not final by the end of the year (December 31), then you will need to file as married for that calendar year as you are jointly and individually responsible for any tax, interest, and penalties. You can choose to file separate returns, but keep in mind that you are legally responsible for a fraudulent return filed by your spouse. This responsibility applies even if the divorce decree states that your former spouse will be responsible for any amounts due on previously filed joint returns.
Innocent Spouse Relief and Other Appeals
Depending on the circumstances, spouses may be relieved of tax or penalties when filing for divorce. If you feel this might be the case, investigate further as no amount is too small to repudiate. The most common type of relief is known as Innocent Spouse Relief. The other two available are called Equitable Relief and Separation of Liability.
Each kind of relief has different requirements and who may qualify for them. You can read more about the qualifications for each one from the IRS, but you must file Form 8857 to request relief under any of these categories.
If you do live in a community property states, as long as you didn’t file joint returns, you may also qualify for relief from tax liability or for equitable relief.
Children and Dependents
Divorce and taxes become more complicated when the couple has children. Different tax breaks are enjoyed if the spouse claims that child as a dependent. These breaks appear as a child tax credit, education credits, and dependent care credit. In these cases, the court must also decide which spouse can claim the child or children based on different factors. The parent who wins custody is also the primary caregiver, so the right to claim dependent status is typically awarded to that parent. However, the custodial parent can release the dependency tax exemption to the noncustodial parent with the use of Form 8332. When several children are involved, do not presume that an even split is fair and should be the course of action – depending on salary earnings and other factors, this could be detrimental to your taxes overall. Contact Success Tax for answers to some of your more complex situations.
If the court decides you must pay Alimony, understand that alimony payments are considered taxable income by the IRS but are also tax-deductible for the spouse making the payments. On the hand, child support is never tax deductible, nor does it count as income to the custodial parent receiving the payments on behalf of the child. Unfortunately, spoken agreements cannot be honored in a court of law. Therefore, keep legal records of all decisions made by the courts, lawyers, and spouses regarding the children as they will be applicable for years to come.
Success Tax Relief Can Help Sort Out Tax Issues Surrounding a Divorce
Divorce is extremely difficult for all involved and there are many unique variables to consider in a divorce case. Tax returns and payment of back taxes is one of the things that you can easily get help with. A full-service tax firm like Success Tax Relief can provide some much-needed help and support during this difficult time and take care of the complicated tax issues related to your divorce.