A woman going through a divorce thinks about dividing a tax debt.
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Dividing a tax debt during a divorce depends on when the debt was incurred, state laws and other factors. Responsibility for back taxes can be shared or assigned to one spouse, often based on whether the debt was incurred before or during the marriage. However, the IRS rules may not match the divorce court's decision. A financial advisor help clarify tax obligations and prepare you for potential financial impacts.
When debt sharing in divorcethe courts look at the type of debt and when it is incurred. Debts incurred during the marriage are typically considered to be shared, making both spouses liable.
Pre-marital debts are usually treated as separate, with each spouse responsible for their own obligations.
Tax debt is often treated in the same way. Whether the debt was accumulated jointly or individually, and whether it occurred during the marriage, are important factors in determining responsibility.
In community property states, courts may decide that both spouses share responsibility for any tax debt incurred during the marriage. This means that the debt is usually shared equally, regardless of differences in income or contributions.
In equitable distribution states, tax debt is divided based on what the court deems to be fair, not necessarily equally. Factors such as each spouse's financial situation, earning potential and contributions to the household are considered. As a result, a larger proportion of the tax debt can be allocated to one spouse. This method applies in all states except the nine that follow community property laws.
A divorce settlement can assign a tax debt to one spouse, but the IRS can hold both spouses jointly liable for a tax debt if they file jointly during the marriage. Even if a divorce decree states otherwise, the IRS can pursue payment from either party.
To reduce this risk, individuals can try relief of innocent spouse from the IRS. This provision relieves spouses of responsibility for tax debt if their ex-spouse has improperly reported or omitted income on a joint tax return without their knowledge.
To qualify, the spouse making the request must show that they were unaware of the errors and that it would be unfair to hold them liable. The IRS considers factors such as financial involvement, personal interest and financial circumstances.
To apply, individuals must file IRS Form 8857, explaining their situation and including supporting documents. The IRS will review the application, taking into account the couple's financial details and the communication during the marriage.
Wife researches tax laws for divorce settlements.
Separation of liability relief allows co-filers to share responsibility for understated tax liabilities between themselves and their ex-spouse.
The IRS assigns a portion of the tax debt to each spouse based on their individual contributions and circumstances, offering a way to separate financial responsibility after divorce or separation.
Unlike innocent spouse relief, this option is only available to those who are divorced, legally separated, or have lived apart from their spouse for at least 12 months.
To apply for separate liability relief, individuals must submit IRS Form 8857. The IRS will review the application, taking into account factors such as each spouse's financial contributions and their involvement in the tax reporting process.
Fair relief available to individuals facing unfair tax liability due to the actions of their spouse or ex-spouse, even if they were aware of the errors. This type of relief covers under-declared tax liabilities and unpaid taxes, offering wider protection compared to other types of relief.
This is different from separation of liability relief, which divides tax debt between spouses. Equitable relief applies where it would be unfair to hold one spouse responsible.
To qualify, the spouse applying must demonstrate that holding them responsible for the tax debt would be unfair in the circumstances. The IRS considers factors such as financial hardship, the current financial situation of the spouse making the request and any evidence of abuse or fraud by the other spouse.
To apply for equitable relief, you must file IRS Form 8857. This form will allow you to explain your situation and provide evidence to support your case.
Man compares community property with states of equitable distribution.
Dividing tax debt in a divorce can be difficult, especially with joint tax returns and IRS rules. Options such as innocent spouse relief, separate liability relief and equitable relief can help avoid unfair responsibility for a former spouse's tax debt. A tax professional can guide you through these options.
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