If you’re thinking about divorce, you should also be considering what tax filing status you should choose. Here’s why.
The advantage of filing a joint tax return is well known — couples generally save money when compared with filing separately. However, there is at least one potential disadvantage. Both spouses are liable for the entire income tax bill, including interest and penalties, even if one earned most or all of the income.
The joint-filing downfall
This issue most commonly arises when there are unpaid taxes from joint-filing years, and a couple later separates or divorces. The IRS can pursue either spouse for the full amount. If you’re the easiest one to find, or if you have liquid assets, you can end up paying the entire bill.
When this happens, the only relief is called the innocent spouse rule. If you can prove that you had no reason to suspect tax shortfalls and you did not personally benefit from unreported income, or that you signed joint returns only under duress, you may get off the hook. Unfortunately, the IRS and the courts don’t often allow innocent spouse relief.
What can you do to head off trouble?
If your family spends much more money than the income shown on your tax returns, it’s an indicator that something’s not right. Ask questions if you don’t understand all the tax and financial issues in the joint return. In certain circumstances, you may even want to consider hiring your own tax professional to advise you before signing.
If you are headed toward separation or divorce, it may be best to file separately. You may pay a little more tax, but that’s better than leaving yourself liable for the tax issues of someone who is no longer on your side. Don’t sign a joint return unless you’re sure that all income has been reported and that the taxes have actually been paid.