How To Deal With Joint Tax Liability In Your Divorce

Divorce may legally dissolve a union but it does not dissolve the tax liability the former couple shared. The adage, “[i]n this world there is nothing that is certain except death and taxes,” absolutely holds true in this instance. By taking an active role in the way your divorce decree is written and by familiarizing yourself with the terms in it, you will better understand your tax implications. 

If on the last day of the tax year you were legally married, you are able to file jointly. Most people choose this option if it’s available to them because it typically results in the lowest tax burden. However, be aware that filing jointly means that you are both fully liable for the contents of the tax filing. The option of the “married filing separately” status is also available. Prior to filing, both parties have to determine how these filing statuses will affect their tax liabilities and benefits. 

If you were legally divorced by the end of the tax year, you may be able to file as a single individual or as a head of household. Filing as a head of household can be more beneficial tax-wise, but you must meet certain conditions. In order to qualify, you must have paid at least half of the cost of maintaining a home and must have lived in the home with a qualifying dependent for over half the year. 

These are simply two possibilities. Unfortunately, situations during the divorce don’t always have the most pleasant outcome, and you may be stuck footing the bill. Even if you, as a former spouse, did not generate any of the income or deductions on the return, you could be held responsible to pay all of the taxes simply because you signed the return. 

The IRS can provide some solace in the form of the innocent spouse relief. By evoking this, you can be relieved of responsibility for paying the tax debts if your former spouse omitted or improperly reported items on your tax return. However, if you are jointly and individually responsible for the tax debt, that does not qualify for relief.  This might be a result of a joint return you both signed and filed while married. The IRS is able to collect that debt from either you or your former spouse. Contact your attorney at Heartland Law or a tax professional for more information on your options. Call (816) 842-6700 or Email us by clicking on the link.  

Tax Dischargeability in Bankruptcy

If you have an income tax debt, and are filing for bankruptcy, it may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code. 

The difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy is that Chapter 7 allows for a full discharge of permitted debts while Chapter 13 issues a payment plan to repay some debts, with the rest of the permitted debts being discharged. Keep in mind, not all tax debts are able to be discharged in bankruptcy, but taxes that are eligible to be discharged in a Chapter 7 are also eligible for discharge in Chapter 13. When you file for bankruptcy, your tax debts must meet a certain criteria in order to be discharged. 

The criteria are:

• All tax debt must be from income taxes

• The tax debt must be part of a tax return that was due at least three years prior to the taxpayer filing for bankruptcy. The due date includes any extensions.  

• The tax return has to have been filed at least two before the taxpayer files for bankruptcy. This date starts when the return was actually filed.

• The tax assessment that the IRS sent you has to be at least 240 days old.

• The tax return cannot be fraudulent.

• The taxpayer cannot be guilty of tax evasion.

• You must also prove to the court that you filed tax returns for the past four years. 

Some of the tax debts that are not dischargeable are those that have not been filed. While the IRS routinely assesses taxes on unfiled returns, these tax liabilities cannot be discharged until the taxpayer files a return for the year in question. 

If you file for Chapter 13 bankruptcy, money owed to the IRS that does not meet the qualifications to be discharged can be repaid through a payment plan that lasts anywhere between three and five years without interest or penalties. One of the benefits of filing a Chapter 13 bankruptcy is if the IRS rejected your previous payment plan, this is a way to get them to accept one.

It is recommended that you speak with your attorney regarding this matter before deciding between filing Chapter 7 or Chapter 13 to get rid of or aid with the burden of tax debt.