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Episode 51 Transcript: Filing Taxes Jointly During Divorce

In today’s episode, I wanted to talk to you about an issue that comes up when people are going through a divorce process, and it’s tax time, and they have to make a decision about whether to file married filing jointly or to file separately. 

Just by way of reminder, there are four different potential filing statuses that you can elect when you file your taxes, and they are not all available to everyone at all times. But the four are: single filing status, which is not available to you if you’re legally married; head of household; married filing separately; and married filing jointly. 

Today, I just want to talk about the basic difference between married filing jointly and married filing separately and then some of the concerns that come up for people who are considering filing jointly during their divorce process.

When you file married filing separately, you each file your own separate tax return. You’re responsible for the taxes on your income and not responsible for the ones on your spouse’s income, and vice-versa. Your spouse is responsible for the taxes on his or her income and not at all responsible for the taxes on your income. 

And I want to qualify that by saying I’m talking about responsible vis-à-vis the government. Responsible in the context of divorce law is a totally different discussion. But just vis-à-vis the government, when you file a separate return, the government is only interested in the taxes you owe on your income. They’re not coming after you for the taxes that your spouse owes on his or her income. 

For many people, that’s appealing. They don’t want to be liable vis-à-vis the government for the taxes due on their spouse’s income. However, often, people file jointly because they, in total, between them, will owe less in taxes than they would owe in total between them if they each filed separately. That’s a long way of saying there’s often a tax savings if you file jointly. 

So, even when people are going through a divorce, even when, let’s say, your communication is strained, your trust is strained or nonexistent, there’s sometimes still a financial incentive to file jointly, right? 

But if you file jointly, you may have the following concerns. 

Number one, what’s going to happen if we get a refund? How can I know how we’re going to share that refund or not share that refund if we file jointly? If I know that I’m going to be entitled to a refund if I file separately, what happens if we file jointly and the refund comes to both me and my spouse? First of all, where is it going? Second of all, I have to get his or her signature to cash that check? So how do I handle my entitlement to my share of the refund? 

Number two, what if we file jointly and we owe a liability? I don’t want to be responsible for that, or I don’t want to be responsible for more than half of that. How can we regulate that? Because bear in mind, and this is the key part of filing jointly that is implicit in what I’m saying but I want to make it explicit. When you file a joint return vis-à-vis the government, each spouse is 100% liable for all of the taxes on all of your combined income. The government doesn’t make a distinction between “Oh, you only owe this much of taxes on the joint return because you only earn 20% of the income.” No. If your name is on the return and you owe a massive tax liability and it’s all related to your spouse’s income, you’re still 100% on the hook for that vis-à-vis the government. 

For that reason, people are concerned about “Well, what if we owe a tax liability? I want to make sure that I’m 0% liable for that or I’m X% liable but only in proportion to my percentage of our taxable income or whatever.”

The third concern that comes up is that when you sign on to a joint tax return, you’re representing to a governmental body that what’s on that return is accurate, is correct, that you believe it to be true. What can later happen, if you disagree, for instance, about how your spouse is reporting his or her income, is that you can find yourself in a sticky situation if, a year or two years down the road, you want to contest your spouse’s representation of their income, say, for tax year 2018. But you signed the joint return for that tax year. Well, then you’re taking two different positions. On the joint tax return, you said that the income reported was true, but later in the divorce case, you want to be able to say that, in fact, it’s not accurate. 

So how can you sign a joint return and preserve your right down the road to say, “You know what? What my spouse said about his or her income actually I never agreed with and I don’t think is true.” That’s another concern that comes up during the divorce if you’re considering filing jointly.

And then finally, somewhat related to owing a tax liability but this would be a future issue. If you were audited three years down the road on that particular joint return, you may want to clarify. For instance, if you’re a W2 wage earner, and your income and taxes are so plain vanilla, there’s nothing to audit there, but then your spouse, in contrast, has a very complicated business or series of business interests and very complicated taxes, lots of deductions, and auditing their income would be a complete mess, you may want to consider and negotiate at the time that you’re signing the joint return, “Well, look, if we’re audited in the future for this year, I want you to take on responsibility for the cost of the audit, or I want to share them in proportion to our income or in this percentage.”

All those concerns come up for people when they’re considering filing jointly with a spouse during the marriage. And the way that they can be addressed during the divorce process is with an interim agreement. 

You and your spouse can say, “Listen. We’re going to file taxes jointly for the last calendar year. We’re going to file married filing jointly. We’re going to file a single return. However, these are the following legal agreements and commitments that we’re making about that joint return. (1) Any refund from that return will be shared in the following way.” And then say what it is. “Any refund from that return will be deposited into the following account.” And then list the account. With regard to liabilities, same deal. You can legally contract around “If we have a liability, if we owe taxes on this return, this person will be X% responsible for those taxes and this person will be Y% responsible.” And that can be 50/50. It can be 100/0. It can be in proportion to your tax incomes for the calendar year or the tax year in question, however you want to slice it. But you can make agreements about that in this interim agreement as a condition of filing jointly.

Third thing, which is important if you disagree about how your spouse represents his or her income and you anticipate that you may, down the road, have to actively contest their representation of income in court, you’re going to want to preserve your right to contest that in the future, and you’re going to want to say in an interim agreement that both spouses agree that just by virtue of signing this joint return, neither of you is representing, in the context of your divorce case, that you agree with the other person’s representation of their income, and you preserve your right to contest the representation of their income in the future. 

The final piece would be speaking to what would happen in the event of an audit, and you can spell that out in this interim agreement, as well. “We’re filing jointly. However, if we are audited for this particular tax year, we agree that either we’ll split the costs of the audit or this spouse is going to pay all of the costs or we’re going to split them in the following way.” And then, in the event that an audit revealed a further tax liability that you weren’t aware of at the time, you can say, “This is how we would split that tax liability in the future.”

This was our brief summary of some of the concerns about and potential solutions for choosing to file joint tax returns during the divorce process. I hope it was helpful for you.

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