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Joint or Separate Returns?

One of the many questions asked by individuals going through the divorce process, especially during tax season is: “Should I file a joint tax return with my spouse?” The answer to this question is relatively simple. The marital status of the parties to a divorce at the end of the tax year determines their option concerning filing federal income tax returns. If a couple is divorced at any time during the year, including December 31, they are considered single for the purpose of filing taxes. However, if the couple is still married at the end of the tax year, they may either file jointly or file their taxes under the status of married filing separately.

Many married people, even in the midst of a divorce, file joint returns because it saves them money. However, the tradeoff for lower taxes is joint and several liability on the return. Despite this minor downfall, many prefer to file jointly in lieu of married filing separately, because this filing provides fewer tax benefits than filing joint returns. For example, taxpayers who file as married filing separately are not eligible to claim the following tax benefits:

  • Tuition and fees deduction
  • Student loan interest deduction
  • Tax-free exclusion of US bond interest
  • Tax-free exclusion of Social Security Benefits
  • Credit for the Elderly and Disabled
  • Child and Dependent Care Credit
  • Earned Income Credit
  • Hope or Lifetime Learning Educational Credits

Since joint tax returns are favored, for the foregoing reasons, parties who file joint returns are permitted to amend filed joint tax returns within three years from the due date of the original returns in the event that any discrepancy is discovered.

One issue that often arises in the context of divorce is one spouse who refuses to sign a joint tax return. There are two ways in which a situation such as this may be handled, depending upon the circumstances. Whether a joint tax return is accepted by the Internal Revenue Services is determined by the intent of the parties as well as the surrounding circumstances. When a couple has historically filed a joint tax return, and one party withholds his or her signature, the other spouse may file a joint tax return regardless, and this return may be accepted by the Internal Revenue Service. See Federbush v. Commissioner, 34 T.C. 740 (1960). In Federbush, it was determined that the tax return was a joint filing even though the wife refused to sign it. Id. This determination was reached because wife’s refusal had nothing to do with the contents of the return, but was related to other marital problems. Id.

On the other hand, a joint return, even if signed by both spouses, may not lead to both spouses being held accountable for its contents, especially what one spouse is forced to sign the return against his or her will. For example, in Anderson v. Commissioner, 47 T.C.M. 1123 (1984), it was determined that wife did not intend to file a joint tax return but signed it only when ordered to do so by the divorce court. In Anderson, the wife had no income and was not even required to file a tax return. Id. She resisted signing the joint tax return because she had concerns about the appropriateness of her husband’s deduction. Id. Her concerns proved to be justified when the IRS found deficiencies in the couples return. Id. Wife was relieved of any liability for the deficiency because it was determined that she did not intend to file a joint return with her husband. Id. Additionally, when one spouse is forced to sign a joint return under threats of abuse or violence, these facts may be used by a spouse as a defense to being held jointly liable for any deficiencies or discrepancies on the return.

Not only do joint tax returns come with potential liability, but they may also result in substantial refunds. Although a federal tax refund check may be drawn to the order of both parties, both parties do not necessarily have equal ownership rights to it.  In fact, it is the source of the overpayment which determines ownership of the refund. Overpayment by a married couple filing a joint tax return is owned by each spouse separately to the extent that he or she contributed to the overpayment. Thus, one of the potential hazards associated with filing jointly is that one spouse may appropriate a tax refund that the other spouse is actually entitled to. When funds are paid to the non-entitled spouse in error, the IRS may grant the spouse who was actually entitled to the funds a credit on their future return, if the error is timely pointed out to the IRS. In summary, the ownership of a joint federal tax refund belongs to the person who made the overpayment and not necessarily the person who earned the income.

With the above in mind, the answer to the above cited question becomes more complex. If your divorce has yet to be finalized and you expect that your spouse may be making intentional errors on your joint tax return, speak with your divorce attorney for specialized direction on how you should proceed. Additionally, as with all tax and other complex financial matters, be sure to consult with a qualified CPA or financial planner before making any major financial decisions.

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