When you are struggling through difficult circumstances in a marriage, taxes could be the last thing on your mind. However, decisions you make a tax time can have a substantial effect on your finances down the road. Here are a few tips that I came up with that I hope can help you make better decisions during this trying time:
Re-evaluate your current advisory relationships
If married clients relay to me that they are going through a divorce, they will also receive some unfortunate news regarding our relationship as their CPA. According to the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct, a CPA should be free of any conflicts of interest. This means I will have a very difficult time representing both parties in a divorce or pending divorce fairly. It is important to re-assess all your advisory relationships, even if your current advisor doesn’t bring up a conflict of interest. As you are going through the divorce, you want to make sure the advice you are receiving is what is best for you, not your spouse.
Considering filing Married Filing Separately
Taxpayers that are married have two filing status choices to pick from which are married filing jointly (MFJ) and married filing separately (MFS). Most often, married couples will file jointly and the reason is the tax code is setup to penalize MFS filing. MFS filers are disadvantaged by losing tax credits such as the earned income credit, education credits and child and dependent care credit. In addition, a greater percentage of social security benefits can be taxable as well as other negative effects. This is why when given the choice, it is rarely more beneficial to file MFS.
However, there is one BIG reason to consider filing MFS. By filing MFJ, each spouse who signs the joint tax return is responsible for the accuracy of the tax return as well as the payment of the tax. A spouse who files MFS is not responsible for reporting or paying tax on items attributable to the other spouse. If you are in a damaging situation where you are unsure of how your spouse is handling your finances or if you believe your spouse could be making bad financial decisions, filing MFS can limit your tax liability to yourself rather than both yourself and your spouse. Work with your tax advisor weighing the possible extra tax bill for the MFS filing versus the liability of MFJ filing.
What if I already signed returns and have a big tax bill due to my spouse?
Even though the IRS clearly states that each spouse is jointly responsible for the accuracy and payment of a married filing jointly tax return, a spouse can sometimes be relieved of part of a joint tax liability by requesting innocent spouse relief.
Innocent spouse relief can be requested by filing Form 8857 and the IRS has a helpful flowchart on the different types of relief on their website and in IRS Publication 971. To qualify for relief, the IRS looks at factors such as your marital status when the relief is claimed, your prior knowledge of any tax return errors or unpaid taxes and the fairness to hold you liable for the underpayment of the tax. The deadline for filing relief must be made within two years of the first IRS collection activity.
Going through a difficult divorce is hard enough without worrying about your tax situation as well. There are many tax and financial decisions that the right advisor can help you navigate. Select an advisor that you trust that can assess your new situation and help you through this challenging time.