A woman going through a divorce is thinking about dividing her tax debt.
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Dividing tax debt during a divorce depends on when the debt was incurred, state laws, and other factors. Liability for back taxes can be divided or assigned to one spouse, often based on whether the debt was incurred before or during the marriage. However, the IRS rules may not be consistent with the divorce court’s decision. AND financial advisor can help clarify your tax obligations and prepare you for potential financial impacts.
When division of debt in divorcecourts look at the type of debt and when it was incurred. Debts incurred during marriage are usually considered joint, making both spouses liable.
Debts from before the marriage are usually treated separately, with each spouse responsible for their obligations.
Tax debt is often treated the same way. Whether the debt was incurred jointly or individually and whether it was incurred during the marriage are important factors in determining liability.
In community property states, courts may decide that both spouses share responsibility for tax debt incurred during the marriage. This means that the debt is usually divided equally, regardless of differences in income or contributions.
In equitable distribution states, the tax debt is divided based on what the court deems to be fair, not necessarily equal. Factors such as the financial situation of each spouse, earning potential and contribution to the household are taken into account. Because of this, one spouse may be assigned a larger portion of the tax debt. This approach is used in all but nine states that follow community ownership laws.
A divorce settlement may allocate the tax debt to one spouse, but the IRS may still hold both spouses jointly responsible for the tax debt if filed jointly during the marriage. Even if the divorce decree states otherwise, the IRS can seek payment from either party.
To reduce this risk, individuals can seek relief for the innocent spouse from the tax administration. This provision relieves a spouse of liability for tax debt if their ex-spouse improperly reported or omitted income on a joint tax return without their knowledge.
To qualify, the filing spouse must prove that they were unaware of the errors and that it would be unfair to hold them liable. The IRS takes into account factors such as financial inclusion, personal benefit and financial circumstances.
To apply, individuals must file IRS Form 8857, explaining their situation and including supporting documents. The IRS will review the application, taking into account the couple’s financial information and communication during the marriage.
Wife researches tax laws for divorce settlements.
Separation of responsibilities the relief allows joint filers to share responsibility for understated tax liabilities between themselves and their ex-spouses.
The IRS assigns each spouse a share of the tax debt based on their individual contributions and circumstances, offering a way to separate financial responsibility after divorce or separation.
Unlike innocent spouse benefit, this option is only available to those who are divorced, legally separated, or have lived apart from their spouse for at least 12 months.
To apply for a separation of liability exemption, individuals must submit Form 8857 to the IRS. The IRS will review the application, taking into account factors such as each spouse’s financial contributions and their participation in the tax filing process.
Equitable relief is available to individuals who face an unfair tax liability due to the actions of their spouse or ex-spouses, even if they were aware of the mistakes. This type of relief covers both understated tax liabilities and unpaid taxes, offering wider protection compared to other forms of relief.
This is different from the separation of liability allowance, which divides the tax liability between spouses. Equitable relief applies when it would be unfair to hold one spouse responsible.
To qualify, the applicant spouse must demonstrate that it would be unfair to hold them liable for the tax debt in the circumstances. The IRS considers factors such as financial hardship, the current financial situation of the filing spouse, and any evidence of abuse or fraud by the other spouse.
To file a claim for equitable relief, you must file IRS Form 8857. This form will allow you to explain your situation and provide evidence to support your case.
A man who compares common property with the just distribution of states.
Dividing tax debt in a divorce can be difficult, especially with joint tax returns and IRS rules. Options such as innocent spouse relief, separation of liability relief and equity relief can help avoid unfair liability for an ex-spouse’s tax debt. A tax professional can guide you through these options.
AND financial advisor can help optimize your investments for taxes. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with trusted financial advisors serving your area, and you can have a free introductory conversation with your advisors to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.
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