Filing taxes is something almost everyone has in common with each other. So, when a couple is going through a divorce, figuring out how to file and what to expect is a common issue.
What happens to my tax refund while I’m going through a divorce?
This is a seemingly simple question that needs a specifically strategic answer. It’s also a question that leads to the larger issue of tax implications regarding the entire marital estate and its asset and debt distribution.
As a general rule, tax debt is marital debt.
In fact, when a married couple is filing as “married filing jointly,” both spouses are responsible for the debt even after the divorce, regardless of their individual situations. In other words, the IRS holds both of them responsible until the taxes are paid in full.
Choosing the right filing status.
Whether to file “married filing jointly,” “married filing separately,” or as a “single taxpayer” (when someone is declared unmarried or head of household) is a question best answered by an accountant or an attorney specializing in tax law. When it comes to addressing tax issues during divorce proceedings, it is a wise choice for either the attorney involved or the client involved to consult with a specialist to provide specific tax advice. As mentioned earlier, tax implications play out throughout the entire marital asset and debt distribution, so how the tax refund is divided is just one of many facets to the divorce matter’s tax considerations.
Once the decision of filing status is made, how will the tax debt and/or refund be divided between the parties?
In making that decision, additional considerations need to be addressed that may have an impact on the ultimate division of the marital estate, which include:
- home mortgage interest deduction
- children’s status, including both exemption and tax credit
- prepayment on income tax
- stocks and stock transfers
- court-ordered spousal support payments
- court-ordered child support arrearages
- medical expenses
- attorney’s fees
- retirement accounts
There’s no easy answer.
Although the IRS offers bright-line tests regarding which situations call for which filing status, the division of that refund and debt is not so clearly defined. But, doing what is right can be fairly simple to reach after taking a look at each party’s contributions throughout the year and dividing what remains equally.
However, keep in mind the entire process of assessing tax implications throughout the divorce process involves the careful consideration of everything mentioned above (and then some!), so seeking the advice of an accountant or an attorney specializing in tax law is helpful and, almost always, necessary.