Tax Topics By Greta Hicks, CPA | Column Editor
Should She Marry Him?
A frequently asked question from female clients is, “My boyfriend has tax problems and he has asked me to marry him. Should I?” The standard answer is, “Tell him yes, but only after his tax problems are resolved.” Once married, his tax problem may become your tax problem. No, this is not a personal advice column, but this a common, and serious, potential tax problem. First, remember that we are in a community property state. Second, the Internal Revenue Service (IRS) follows the income and property laws where the taxpayers are located. Because of certain tax benefits married filing jointly (MFJ) allows, many married taxpayers choose to file a joint tax return. If MFJ is elected, “both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. One spouse may be held responsible for all the tax due.” Facts from a recent phone call: Jean is a teacher with two children and owns her home. All her income taxes have been currently filed and fully paid. Her boyfriend, Joe, owes back taxes. When he asked her to marry him, she said “Yes.” What are the possibilities regarding the taxes and what are potential solutions? 1. Prenuptial agreement. Consult with an attorney to discuss the possibility of her income being her income and her house remaining her house. A prenuptial is not a cure-all, but it is better than no agreement. 2. Suppose they file a joint tax return, and the IRS keeps their refund and applies it to his back taxes. What are her remedies? Rev.
Rul. 2004-74 provides guidance under Internal Revenue Code (IRC) 6402 “regarding the amount of an overpayment from a joint tax return that the IRS may offset against a spouse’s separate tax liability for taxpayers domiciled in Texas.” Three different fact situations as discussed and the solution is determined by which spouse made tax payments and which spouse incurred liability. She can file a Form 8379, Injured Spouse Allocation. The IRS will use a formula discussed in Rev. Rul. 2004-74 to determine which part of the refund is hers and refund that amount to her. When filing a Form 8379 “with a joint tax return or amended joint tax return, enter ‘Injured Spouse’ (preferable in red) in the upper left corner of page 1 of the joint return.” IRS Tax Tip 2011-60, Revenue Ruling 74-611, Rev. Rul. 85-70, Publication 555 at www.irs.gov and the Financial Management Services, www.fms.treas.gov, provide additional information regarding application of income tax laws in a community property state. If Form 8379 is not timely processed, call the Treasury Offset Program Call Center at 800-304-3107. 3. Maybe the remedy is to file a married filing separately (MFS) income tax return. Humm? First, the MFS tax bracket is higher, which results in more taxes than filing as MFJ. Also, in a community property state (without a prenuptial agreement), the income of both individuals is added together and divided in half. The good news is each will owe income taxes on one-half of their community income
Greta Hicks, CPA, is a consultant on IRS problems, seminar discussion leader, author of continuing education courses and web content provider. She can be reached at gretahickscpa@yahoo.com or www.gretahicks.com.
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Today’sCPA
| MAY/JUNE 2013