Going through a divorce can be a complicated process. Dividing up assets, going to custody hearings, and arranging a new living situation for yourself is enough to leave anyone emotionally drained. One thing that should not be lost in the shuffle though is what is going to be done about any income tax debt that may have been incurred while you were married.
WHAT CAN AND CAN’T BE SEPARATED
First, let’s address federal income tax debt since it is important to make a distinction between federal and state income tax.
Federal
Any federal income tax debt that was incurred while married and that came from the filing of a married filing joint return will allow the IRS the ability to collect on either spouse, whether or not your divorce decree stipulates only one spouse is responsible for paying the debt or if each spouse is responsible for a portion of the debt.
Example:
- Husband (H) and Wife (W) incurred $20,000 of federal income tax debt through filing a married filing joint return each year they were married. In the divorce decree it states that H is responsible for paying the full $20,000. So, he sets up an installment agreement with the IRS. This installment agreement will protect both H and W from collection action and satisfy the IRS. However, if H defaults on the agreement because he is unable to continue making payments, the IRS cannot only try and collect the debt from H but, they can also collect the debt from W because she is jointly liable.
Important Note: Even if an installment agreement is in place that protects both spouses, any tax refund that would be due to either spouse will be kept by the IRS and applied to the back taxes. Because of this, many people avoid having a refund by adjusting their withholdings so they only paying the necessary amount of taxes throughout the year. If a refund is kept and the divorce decree states one spouse is responsible for paying the back taxes due, your options are limited to having your ex-spouse compensate you for the refund that was offset (either through negotiations or a lawsuit).
State
Now let’s take a look at state income tax debt and what options may be available. According to California Revenue and Taxation Code (“RTC”) § 19006, whenever a married filing joint return is filed both spouses are jointly liable. This is of course the same as the IRS but, RTC § 19006 also states the liability may be revised by a court in a proceeding for dissolution of the marriage or for termination of the registered domestic partnership of the spouses.
This means that as long as you include the information necessary to determine whose debt is whose, you can allocate who is responsible for paying the state income tax.
THINGS YOU NEED TO BE AWARE OF
- You are not able to allocate any state income tax debt to your spouse that was actually incurred due to your income or assets. For instances, if you make $50,000 in a year and have no taxes withheld and your spouse makes $50,000 and has the proper amount of taxes withheld, this would mean that your income was the one causing the tax debt and therefore you are unable to force your spouse to be solely responsible for the debt.
- You need to make sure in the divorce decree that you individually state each year that a state income tax debt was incurred and that you show for each year how much of the debt was caused by your income or assets and how much was incurred because of your spouse’s.
- You cannot revise a tax liability that has already been paid but, any unpaid tax debt can be revised. This would be applicable in the case that perhaps you had been making the payments on a tax debt that was caused by your spouse’s income or assets. You would not be able to force your spouse to pay you back for the amount you had already paid but, you can allocate the remaining amount to be the responsibility of your spouse after the divorce.
- For any year that the gross income exceeds $150,000 on the tax return or if the total amount of state income tax that you would be relieved of exceeds $7,500, you will need to obtain a tax revision clearance certificate from the Franchise Tax Board.
CONCLUSION
Even though you may not be able to get the IRS to honor the divorce decree showing who is responsible for paying the federal income tax debt, you are able to have the state honor the agreement for the state income tax debt. The tougher part will most likely be getting your spouse to agree to the terms. It is always advisable in these situations to consult with your divorce attorney and possibly a tax attorney as well, to make sure everything is structured properly.
Related Topics:
- Separation of Liability: A Tool For Splitting Tax Debt After Divorce
- Community Property and The Federal Tax Implications
- 5 Things To Know Before Filing For Innocent Spouse Relief
- Tax Refund Offset Going To Spouse’s Debt? Injured Spouse Relief May Help
- Innocent Spouse Relief vs. Injured Spouse Relief: Five Differences You Need To Know
- IRS Tax Debt Relief: Do You Qualify For Equitable Relief?
