With the October 15th tax deadline approaching, I am receiving emails from numerous clients regarding disputes with their estranged spouse over how to file last year’s taxes. These disputes arise because one spouse wants to file jointly and the other spouse wants to file separately. Sometimes, rarely, the spouse who wants to file separately desires this because he or she is concerned the other spouse is committing tax fraud. In those situations it’s best to file separately (assuming there’s a basis for that concern).
However, in most cases, the spouse who desires to file separately is either expecting a large refund (which he or she doesn’t want to share) or believes the other spouse will have tax liability (which he or she doesn’t want to be responsible for). This assumption is only true if the other spouse doesn’t treat this refund or obligation as partially marital.
If the marital dissolution action was filed this year, all of the previous year’s tax liability or refund is marital property, subject to equitable distribution. The “marital estate,” “is created at the time marital litigation is filed or commenced…” S.C. Code § 20-3-610. Thus, if a marital dissolution action is filed in 2020, all of 2019’s tax liabilities, including refunds, are marital property. Even if the marital dissolution action was commended in 2019, some of the liability or refund is marital.
For purposes of this analysis, I am assuming that neither party changed his or her withholding after marital litigation commenced. In that circumstance, an accountant will likely be needed to determine how much of the tax liability was created from January 1st through the date of filing (marital debt) and how much was incurred afterward (not marital debt). Absent that circumstance, one simply needs to determine what percentage of the year passed before marital litigation was filed. A filing date of March 31st makes the tax liability one-fourth marital. A filing date of September 30th makes the tax liability three-fourths marital.
From a purely tax liability standpoint, spouses are always jointly better off filing together than separately. Any total refund will be bigger or total liability will be smaller if they do so. However, as noted above, sometimes one spouse will not want to file jointly–thinking that by doing so the refund will be solely his or hers or the liability will solely be the other spouses’.
In such cases, the spouse who wishes to file jointly should calculate his or her tax liability if he or she has to file separately, determine the percentage of that liability which is marital, and let the other spouse know that he or she will be seeking to have that spouse reimburse half that amount in equitable distribution. In most cases, that causes the other spouse to reconsider his or her position on filing separately. In situations in which one spouse wants to file separately to keep all the refund, a simple remainder that one-half of the marital portion of that refund will be sought in equitable distribution, and that the refund will be bigger if they file jointly, will typically obtain a similar reconsideration.
This only works if one knows what one’s tax liability will be if one files separately and if one lets the other spouse know one will be seeking contribution for this liability. However, in my experience, doing this resolves most tax filing disputes.
I love reading your posts. I have learned a lot of helpful and interesting information even though I am not a client. I think a post concerning divorce and claiming dependents would be another great topic for a future post. I assumed my final divorce decree stating my ex would claim our son on even years and I would claim him on odd years would have final say. We share joint physical custody, he is with me every other week from Monday at six until the following Monday at six. My ex violated our divorce decree and claimed our son without my knowledge when it was my year to do so. I never had any reason to question or ask about this topic during the divorce proceedings. The IRS has final say and you have to submit a paper return with supporting documentation for review. I now keep very detailed records. I had to get my attorney to address in family court. I think this is important information for anyone in a high conflict divorce or anyone dealing with financial abuse.