Navigating Tax Debt in Divorce: Understanding Your Options
When it comes to dividing assets and debts in a divorce, tax debt can be a complex and contentious issue. The responsibility for back taxes may fall on one or both spouses, depending on when the debt was incurred and the laws of your state.
Community Property States vs. Equitable Distribution
In community property states, marital debts, including tax debt, are typically split equally between spouses, regardless of income or contributions. The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, courts may decide that both spouses share the responsibility for any tax debt incurred during the marriage.
On the other hand, in equitable distribution states, tax debt is divided based on what the court considers fair, taking into account factors like each spouse’s financial situation, earning potential, and contributions to the household. This approach applies in all states except the nine that follow community property laws.
IRS Rules and Joint Liability
Even if a divorce settlement assigns tax debt to one spouse, the IRS can still hold both spouses jointly liable for tax debt if they filed jointly during the marriage. To reduce this risk, individuals can seek relief from the IRS through various options.
Innocent Spouse Relief
Innocent spouse relief relieves a spouse of responsibility for tax debt if their ex-spouse improperly reported or omitted income on a joint tax return without their knowledge. To qualify, the requesting spouse must show they were unaware of the errors and that it would be unfair to hold them liable. The IRS considers factors like financial involvement, personal benefit, and financial circumstances.
Separation of Liability Relief
Separation of liability relief allows joint filers to divide responsibility for understated tax liabilities between themselves and their ex-spouse. The IRS assigns each spouse a portion of the tax debt based on their individual contributions and circumstances. This option is only available to those who are divorced, legally separated, or have lived apart from their spouse for at least 12 months.
Equitable Relief
Equitable relief is available for individuals facing unfair tax liability due to their spouse’s or ex-spouse’s actions, even if they were aware of the errors. This type of relief covers both understated tax liabilities and unpaid taxes, offering broader protection compared to other forms of relief. To qualify, the requesting spouse must demonstrate that holding them responsible for the tax debt would be unfair under the circumstances.
Seeking Professional Guidance
Dividing tax debt in a divorce can be a complex and daunting task. A financial advisor can help clarify tax obligations and prepare you for potential financial impacts. Additionally, a tax professional can guide you through the various relief options available to you. With the right guidance, you can navigate the complexities of tax debt in divorce and move forward with confidence.
Leave a Reply