Thursday, February 14, 2013
When a married couple files a Form 1040 U.S. Tax Return together, claiming their income, deductions and credits on the same form, they are filing a joint tax return. Both spouses must sign the return or give their permission for e-filing. Generally, filing a joint tax return results in lower overall tax rates for the couple. However, the tax rate should not be your only consideration when deciding to file jointly.
What are your rights and responsibilities?
Filing a joint tax return requires trust in your spouse, because both spouses become responsible for the tax and any interest or penalty due on a joint return. Both parties must ensure the accuracy and completeness of the return. One spouse may be held responsible for all the tax due even if all the income was earned by the other spouse. This concept is called joint and several liability.
The IRS does provide a process wherein a spouse can request to be relieved from joint tax debt after the fact, but the application and pursuit of the debt forgiveness can be a long, expensive process. Spouses are better served by avoiding the potential battlefield of unpaid joint tax debt by carefully considering whether to file a joint tax return in the first place.
When should you consider filing separately from your spouse?
1. You do not trust that your spouse is honest in reporting his or her income, deductions and credits. When in doubt, file separately.
2. Sometimes, one spouse may take extremely aggressive positions on income or deductions. The other spouse may want to file separately for protection in the event the IRS disputes the positions taken on the tax return.
3. You can amend a separately filed return and file jointly within a certain time period, but returns originally filed as joint returns cannot be split into separate filings by amendment after the due date. If you believe you may want to amend your return and file separately, then you should file the original return separately.
4. A spouse may have child support or alimony obligations from a previous relationship, and does not want his/her income combined with a new spouse either for calculation of the support or because the tax returns may be discoverable in the litigation.
5. If a refund is due because of one spouse’s income, but the other spouse has outstanding tax debts, student loans, or child support in arrears be aware that the entire refund of both parties can be seized when the tax return is filed jointly. If you are concerned, file separately.
6. Certain medical bills and other expenses are deductible, but they must exceed a certain percentage of your Adjusted Gross Income. Joint income may be too high to benefit from the deduction. Have your accountant run both scenarios for you (filing jointly and separately) to determine if your medical expense or other deductions are high enough to warrant a joint return.
So, what is best for me?
Consult with your lawyer and accountant to determine the best course of action in your particular situation. Your accountant will be able to prepare your tax return using different scenarios so that you can compare tax liabilities. Your lawyer will be able to discuss your risk and exposure.