Should Divorcing/Separated Couples File A Joint Tax Return?
With tax season coming to a close, many couples who have separated are having issues filing their taxes for 2011. There are many things to consider, such as whether to file jointly or separately, how to divide the deductions and credits if filing separately, and how tax misconduct by one partner may affect the liability of the other. These issues are difficult and can require the advice of an attorney, a CPA, or both.
Recently, Forbes contributing editor Peter J. Reilly published an article that considered the question of why divorcing spouses might file jointly (link). Often parties to a divorce who have filed jointly in the past automatically assume that they will file jointly until their marriage is dissolved. Reilly explains that the option to file separately exists, and for some parties may be preferable to filing a joint return.
For one, filing separate tax returns can allow the spouses to preserve greater financial flexibility with regards to their taxes. Parties can amend their separate returns to create a joint return, but the reverse isn’t possible. This means that once a tax return is filed jointly, it is, to a degree, set in stone and cannot be amended to take advantage of some of the benefits of filing separately.
Second, when married parties separate, each party loses any concrete understanding that person might have had of the other party's financial circumstances. If someone was to sign a joint return that turned out to be fraudulent because of the actions of their estranged spouse, the IRS could hold them responsible for any tax debt. Innocent spouses do have options, but they are not guaranteed.
Third, even if there is no fraud involved, Reilly warns that both parties on a joint tax return are responsible for the total tax, even if their means to pay it are unequal. Married parties filing jointly have what is known as joint and several liability, which means that the IRS has the ability to collect any outstanding tax debt from either party on the return, even if their overall contributions to the tax liability--via capital gains taxes on investment income, for example--are unequal.
Of course, there are considerable benefits to filing a joint tax return, not least among them a generally lower tax rate. A joint return will typically produce a lower tax rate than two married filing separately returns (though often not less than two single separate returns), and standard deductions and some tax benefits may change if the parties choose to file separately. (See IRS Publication 501) As long as parties were still married on the last day of the year, they eligible to file a joint return.
In all scenarios, it is very important for parties involved in a dissolution to get good tax advice, as they are in a unique position and the law is complicated. The family law attorneys at Seeley & Madigan, LLP and their affiliated CPAs have dealt with these issues many times and are able to give advice tailored to an individual situation.