Marriage is supposed to be all about compromise and sharing. But among the things that spouses may want to not share is their partner's tax burden. Although filing joint tax returns often gives a couple the lowest amount of tax due, sometimes there are good reasons for a married couple to file separately.
Separate or Joint?
The question of whether one spouse is liable for the debts of the other generally comes down to whether those debts are in both spouses' names. The situation may be different in community property states, such as California. In most cases, however, if a married couple files a joint tax return, the IRS considers both spouses to be jointly and severally liable for that year's tax debt.
But what if the couple files separate returns? If one spouse owes a large tax and the other does not, only the spouse who owes the large amount is legally liable to the IRS for that amount.
The advantages of filing separately become even clearer if you consider the actions the IRS might take for non-payment of taxes or other tax-related problems. For example, if you do not pay your taxes on time, the IRS can garnish your wages, place tax liens on assets or seize personal property or real estate. These actions are known as a tax levy.
Often a couple that filed a joint return will discover that one spouse's large tax burden means that the other spouse's wages are garnished to pay the tax. However, if a couple's assets (such as a home, car, boat, retirement savings, or rental income) are held in just one spouse's name, and the other spouse owes the substantial amount, and the couple files separate tax returns, those assets cannot be taken by the IRS.
Other tax-related problems may also be avoided by filing separately. One common example is child support payments. If one spouse is behind on child support payments from a previous marriage, the state child support office can ask the IRS to withhold any tax refunds that would otherwise have gone to both spouses. By filing separately, only the tax refund of the spouse who is responsible for the child support payments would be withheld.
Disadvantages to Filing Separately
Although filing separately may make sense for some couples, IRS rules generally make joint filing more attractive. If you don't file jointly, you lose the ability to take advantages of certain tax credits, such as:
- Credit for child and dependent care expenses
- Earned income credit
- Education credits, including Lifetime Learning Credit and American Opportunity Credit
- Credit for the elderly and disabled
Other benefits and credits are calculated based on income levels that are half of what they are for married couples, making some credits (such as the child tax credit and retirement savings contributions credit) more difficult to qualify for if a person's income is too high.
There are some deductions (such as those for unreimbursed medical expenses) that are often easier to qualify for if the two spouses file separately. Often the only way to know for certain which filing status is better is to "run the numbers" and figure the tax returns both ways to see which produces a lower total tax.
Innocent Spouses
What about the situation in which a couple has filed a joint return, and it turns out one spouse significantly underreported his or her income or claimed improper deductions, while the other spouse was completely unaware of any irregularities? In general, both spouses are still liable for any unpaid taxes due when the IRS discovers an issue like this, which the IRS calls an "understatement" of tax. But fortunately, there is a defense for innocent spouses.
To qualify for innocent spouse relief, the spouse must convince the IRS that he or she didn't know -and had no reason to know -of the understatement. Furthermore, the spouse must show that it would be inequitable to hold him or her responsible for the payment of the amount due.
When determining this, one important factor is whether the spouse directly benefitted from the understatement of tax. Thus if the spouse used an improper tax windfall to go on a spending spree, it's not likely that the IRS would allow him or her to qualify for innocent spouse relief. Another factor is whether the spouses have been divorced or separated. If domestic violence is involved, the IRS may take extra precautions so that notifications and investigations regarding innocent spouses do not reveal the victim spouse's location.
People who may qualify for innocent spouse relief have two years to file for it, starting on the date the IRS begins collection action. But only a relatively small percentage of those who file are granted innocent spouse relief by the IRS. That is why it is important to have an experienced tax attorney to help navigate the process and present the case to the IRS in the best possible light.
What should you do if you are you an Injured Spouse?
You may be an injured spouse if you file a joint tax return and all or part of your portion of the overpayment was, or is expected to be, applied (offset) to your spouse's legally enforceable past-due federal tax, state income tax, child or spousal support, or a federal nontax debt, such as a student loan.
To avoid having your portion of the refund taken, file IRS Form 8379. This form is filed by one spouse (the injured spouse) on a jointly filed tax return when the joint overpayment was (or is expected to be) applied (offset) to a past-due obligation of the other spouse. By filing Form 8379, the injured spouse may be able to get back his or her share of the joint refund.
Hire a Professional
Dealing with tax problems can be overwhelming, complicated and very stressful. An experienced tax attorney will guide you through the process of dealing with the IRS and keep you informed of your rights. Having the right counsel to protect your rights makes dealing with the IRS much easier.
