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Man and woman, married couple having financial problems at home.
This is not about what I see as the most underreported tax story of 2021 – people who can save thousands from filing separate returns and avoiding credit phaseouts. You can read about that here. This is for the people who year in year out are pressured into signing joint tax returns without really understanding them. Relax. I am not being judgy.
There are things much more important than taxes that I leave entirely in other people’s hands. So if your spouse has been tending to your tax compliance, that can be OK. Only now that you are getting divorced, it is not OK anymore. It is time to take charge and embrace Reilly’s Twelfth Law of Tax Planning – Joint filing is an election. It is not one of your marital vows.
The Problem With Joint Filing
The pressure for joint filing comes from the assumption, generally accurate until recently, that a joint return will close to inevitably result in a lower tax than two married filing separate returns. If you and your spouse have been living separately for the last six months of the year and you have one or more of the kiddies with you, you may qualify for the head of household rates, but let’s put that possibility aside.
The big problem with joint filing is “joint and several liability”. Let’s assume you are the spouse with a relatively modest W-2 with withholdings. It is relatively easy to figure out what your liability would be married filing separately. If the only difference is the rate table, it should be no different than it would be if you were single. Get that MFS (married filing separate) return prepared and be ready to file it. If your income is below the filing threshold, even zero, do that regardless. We will see why.
Joint and several liability means that the IRS can collect the entire balance from either spouse. And here is where Reilly’s Tenth Law of Tax Planning – Once the tax is more than you can pay it might not matter how much more – comes into play. If your ex would have a large liability from a separate return, helping them out by filing jointly is a losing proposition if that lesser liability is not paid by your ex. If it is so large that it ends up with IRS Collection, you will not even have helped them out. What the IRS gets from people who do not send in the balance due with their return is their RCP (reasonable collection potential). By making it a joint return, you are increasing RCP, because now they can come after you also.
Assuming you are confident that there won’t be an unpaid balance due, the other thing you need to consider is whether your ex has high audit potential. If you are a pokey W-2 person and they have high flying complex business stuff going on. that is another good reason to avoid joint filing.
There is potential relief from joint and several liability. It is called Innocent Spouse Relief and you can read about it here. I like to learn from experience, other people’s experience. And I have learned a lot about innocent spouse status from other people’s experience by reading Tax Court opinions. It can be hard to get innocent spouse status. And when I read those opinions a very common takeaway is why didn’t that person file separately?
And here is why I want you to have that separate return ready. Even if you don’t sign a joint return, you can be deemed to have consented to it. You can read that sad story in a recent Ninth Circuit opinion, I covered recently. Robin, as I named the prospective innocent spouse, always had somebody else take care of their filing and for a brief time when they were on their own did not file at all. They would not have had much of a balance due on a separate return, but the liability for the joint return they did not sign was a doozy. And there was no innocent spouse relief.
I have thought that Innocent Spouse would be a great title for a mystery novel or a thriller. So I checked to see if it has been done. Turns out that the title has been used – in a memoir. Innocent Spouse by Carol Ross Joynt is a memoir by a woman who found herself facing a huge liability from an audit of her husband’s business after he died suddenly. Listen to what she has to say about joint returns:
Basically, if your spouse has a business that might be a little sketchy, you can love them and still file separately.
You ex and their advisers may pressure you to sign a joint return and tell you that “innocent spouse” can bail you out. Don’t believe it. It is really hard. Get some independent advice and make sure you make your advisor aware of your concern about getting stuck with an unexpected bill.
And For Tax Pros
We really need to remember that when we are preparing a joint return that we have two clients. Particularly when it comes to the final joint return, we need to recognize that their interests might not be aligned. Make sure that both parties are aware of the implications of joint and several liability. And that joint filing is an election – not a marital vow.
I haven’t read Innocent Spouse yet. So many books, so little time. Here is an excerpt, though, that gives you one of the more dramatic moments and a Washington Post review.