Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature
by Joseph W. Cunningham, JD, CPA
As the end of the year approaches, income tax ling questions frequently arise. The following are selected tax filing tips and related information.
Joint Income Tax Returns
It is widely known that if a couple is legally married as of December 31, they may file a joint tax return for the year. This is often beneficial if one spouse has substantially more income than the other – usually resulting in the higher level income taxable in a lower tax bracket. In such situations, it is not uncommon for divorces concluding late in a calendar to defer entry of a judgment into the succeeding year to take advantage of joint tax return filing one last time.
However, under current tax rules – including the pernicious alternative minimum tax – it is generally advisable to “run the numbers” assuming, alternatively, joint tax return filing and separate tax return filing, to determine which will result in the lower combined tax. If the latter would result in the lower tax, entering the judgment in the current year should be considered.
Whenever a joint return may be filed for a year and it is certain the parties will be divorced in the following year, the following matters may be also relevant considerations:
Joint and Several Liability
If a joint return is filed, the parties will be jointly and severally liable for unpaid taxes and/or deficiencies later arising from an IRS tax examination. So, if it is suspected that one spouse is underreporting income and/or claiming excessive deductions, it is generally advisable that the other spouse not agree to file a joint tax return.
While Innocent Spouse Relief protects some unwary joint filers from liability, such protection may not be available if a spouse had reason to believe that income is understated or deductions are padded.
Take Away – Consider potential liability before deciding to file jointly to achieve tax savings.
Joint Tax Refunds
Most divorce settlements provide for the division of a tax refund on the final joint return. The check will be sent to the address on the return and will be payable to both parties. Thus, delay in receipt of a refund may result if the principal residence is used on the return and the refund is sent after the house is sold and the effective “forwarding address” period has expired. If this is foreseeable, use another address on the return (e.g. in care of the CPA/tax preparer).
Take Away – Consider any potential logistical problems concerning receipt of a joint tax refund and make appropriate arrangements.
Joint Tax Overpayments Applied to Estimated Tax
Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)