Dividing tax debt during a divorce can be complex and depends on various factors such as when the debt was incurred and state laws. The responsibility for back taxes may be shared or assigned to one spouse, typically based on whether the debt was accumulated before or during the marriage. It’s important to note that IRS rules may not always align with the decisions made by a divorce court. Seeking guidance from a financial advisor can help clarify tax obligations and prepare individuals for any potential financial impacts.
When dividing debt in a divorce, courts consider the type of debt and when it was acquired. Debts obtained during the marriage are usually seen as shared, making both spouses accountable. On the other hand, debts from before the marriage are typically treated as separate, with each spouse responsible for their own obligations. The same approach often applies to tax debt, with the timing and nature of the debt being crucial factors in determining who is responsible.
The division of tax debt can also vary based on whether the state follows community property laws or equitable distribution principles. Community property states, including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, generally split marital debts equally between spouses, regardless of income or contributions. In these states, both spouses might be held responsible for tax debt incurred during the marriage.
Conversely, in equitable distribution states, tax debt is divided based on what the court deems fair, considering factors such as each spouse’s financial situation and contributions to the household. This means that one spouse may be allocated a larger portion of the tax debt in these states. This distribution method is followed in all states except for the nine community property states mentioned.
It’s important to note that even if a divorce settlement assigns tax debt to one spouse, the IRS can still pursue payment from both spouses if they filed joint tax returns while married. To mitigate this risk, individuals can seek innocent spouse relief from the IRS, which relieves a spouse of tax debt responsibility if they were unaware of any errors made by their ex-spouse on joint tax returns.
Separation of liability relief is another option that allows joint filers to divide responsibility for understated tax liabilities between themselves and their ex-spouse based on individual contributions and circumstances. This option offers a way to separate financial responsibility after a divorce or separation.
For those who are divorced, legally separated, or have lived apart from their spouse for at least 12 months, applying for separation of liability relief involves submitting IRS Form 8857. The IRS assesses various factors such as each spouse’s financial contributions and involvement in tax reporting when reviewing the application.
Equitable relief serves as a recourse for individuals burdened by unfair tax liability resulting from their spouse’s actions, even if they were complicit in the errors. This relief encompasses both understated tax liabilities and unpaid taxes, offering more extensive protection compared to other relief options. Unlike separation of liability relief, which divides tax debt between spouses, equitable relief intervenes when assigning responsibility solely to one spouse would be unjust.
To qualify for equitable relief, the spouse seeking it must demonstrate the unfairness of holding them accountable for the tax debt under the circumstances. The IRS considers factors including financial hardship, the current financial status of the requesting spouse, and any instances of abuse or deception by the other spouse. Filing IRS Form 8857 is necessary to apply for equitable relief, enabling individuals to present their case and provide relevant evidence.
Navigating the division of tax debt in the context of a divorce can be intricate, particularly with joint tax returns and IRS regulations in play. Relief options such as innocent spouse relief, separation of liability relief, and equitable relief offer avenues to prevent undue responsibility for a former spouse’s tax liabilities. Consulting a tax professional can help individuals understand and leverage these options effectively.
In tax planning, a financial advisor can assist in optimizing investments for tax efficiency. Finding a suitable financial advisor is made easier with tools like SmartAsset, which matches individuals with vetted advisors in their area for a free introductory call to determine the best fit. Utilizing resources like SmartAsset’s tax return calculator, which includes updated brackets and rates, can help individuals gauge how their income, withholdings, deductions, and credits impact their tax refund or balance due.
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Source:
How Tax Debt Is Divided During a Divorce – SmartReads by SmartAsset
