Tax Issues For Divorcing Couples
Tax consequences follow every decision made in a family, a fact which often comes to the forefront during divorce proceedings . Whether there is a divorce, annulment, separate maintenance agreement, or dissolution, taxes need to be considered in making informed choices.
Married couples in Maryland typically file joint tax returns. The husband and wife are responsible jointly and individually for payment of correct taxes on their taxable income. One spouse may contribute little or no income but will still be liable if the other spouse understates or makes an underpayment of the amount of income tax due.
Innocent Spouse Option
A spouse in Maryland can now elect to seek innocent spouse status if he or she meets all of the following five criteria:
- A joint return was made,
- There was an understatement of tax attributable to erroneous items of the individual’s spouse,
- In signing the return the individual did not know, and had no reason to know, that there was an understatement of tax,
- Taking into account all of the facts and circumstances it is inequitable to hold the individual liable for the deficiency in tax,
- The individual files an innocent spouse election with the IRS and elects to apply for relief no later than two years after the date of the Service’s first collection activity after July 22, 1998, with respect to the individual.
Separation of Liability Option
The tax code now has separate elective rules for taxpayers in Maryland who are no longer married, legally separated, or not living together. If a spouse qualifies for such an election, the divorced or separated spouse’s liability for any assessed deficiency cannot exceed the portion of such deficiency considered allocable to the individual spouse.
Relief from the other spouse’s liability is barred to the extent the electing tax payer had actual knowledge of the understated tax. A divorced or separated individual seeking separation of liability status with regard to a previously filed joint return must meet the following criteria:
- A joint return was made,
- At the time relief is elected the individual is no longer married to, is legally separated from, or has been living apart at all times for at least 12 months from his or her spouse or former spouse; or the spouse died.
- The individual elects to apply for relief no later than two years after the date of the Service’s first collection activity after July 22, 1998, with respect to the individual,
- The liability remains unpaid at the time relief is elected.
Neither the innocent spouse nor the separation of liability option authorizes relief from tax liabilities that were properly reported on the return but not paid. However, such relief is now available in Maryland as an “equitable relief” option.
To learn more about Maryland’s divorce laws and how they may affect your tax situation, please contact one of our family law attorneys today as these situations can become quite complicated and solutions should be customized for each individual.