Going through marital separation is hard enough. You shouldn’t have to deal with tax complications on top of heartache.
Yet, you may find that issues from your past continue to haunt you every April. You file the right forms, check the right boxes, and you’re still denied your return. Or, it’s lower than you expected.
Why? There’s an issue with your ex-husband’s or ex-wife’s taxes. Or, you’re still married but your spouse’s old debts linger and cut into your return.
Does it have to be this way forever? The short answer is “no.”
Marriage and taxes may be interwoven, but you don’t have to pay on someone else’s debt. Today, we’re breaking down two different ways you can relieve this burden: injured spouse vs innocent spouse relief.
Read on to find out which category you fall into and how to claim what’s yours moving forward.
Ready to learn more? Let’s get into it.
What Filing Jointly Means
As a married couple, did you and your spouse file your taxes together? If so, you would have checked the “Married Filing Jointly” box on your form. In short, this means that the IRS looks at your combined incomes, exemptions, and deductions to determine a single return (or liability) on that figure.
The catch? You aren’t required to file this way.
The IRS doesn’t make you complete a joint return, even if you marry before the end of the tax season. You can still file separate married tax returns on Form 1040, though combining your assets can often offer you a more substantial tax break.
There are both pros and cons to filing this way. Let’s review each.
The Pros of Filing Jointly
Why file jointly with your spouse? You could receive a greater number of tax breaks and considerations if you do so.
For instance, your standard deduction may be higher if you combine the contributions of both parties. This allows you to deduct a substantial part of your income, which can help lower your liability.
The IRS also applies a higher income threshold to married couples who file together. This means you can qualify for certain tax breaks even if your combined income is larger than an individual’s. In most cases, filing jointly is the smartest move, especially when both parties are responsible with their finances.
The Cons of Filing Jointly
While there are advantages to sticking together come tax time, this might not be in your best interest due to the inherent risks. Though the IRS looks at your return as a shared entity, each spouse is responsible for making sure his or her numbers are accurate.
If there’s an error or purposeful oversight, you could both be liable. The IRS can claim the money from one of you or, in some cases, both of you. In tax jargon, this is “joint and several liability.”
This means that if your spouse doesn’t pay his share, you may get stuck with the bill. Or, if your spouse reports his taxes and they are incorrect, you may be responsible for paying the correct amount as determined by the IRS.
While this may not be an issue when you’re together, things become tricky once you decide to separate. If your now-ex decides to skip out on taxes or report them in an inaccurate way, should you bear that burden for years to come?
No. There are two main ways to relieve that financial strain: injured spouse relief and innocent spouse relief. Let’s review both in more detail.
Innocent Spouse Relief
Even if the infraction occurred years ago, you could remain responsible for your ex’s tax bill. Filing for innocent spouse relief is one way to remove yourself from that liability.
You can file for innocent spouse relief if you didn’t know, and had no reason to know, that your current spouse or ex-spouse owed money when filing his taxes or otherwise lied on the return. One of the most common examples of this scenario is income that goes unreported or understated.
You may have thought your spouse made a certain amount of money when he actually made a higher amount. Come tax time, however, he only enters the lower amount. Or, your ex may have claimed a tax deduction, property basis, or credit that didn’t apply to him in an attempt to drive down his overall liability.
Let’s review an example.
You file a joint return with your spouse and submit it as usual. A few months later, you separate. Around that same time, you receive a letter from the IRS that claims your spouse didn’t report $10,000 in earnings from the previous year.
Turns out, your ex made this extra income during the time of your marriage. Yet, you knew nothing about it.
In this case, you’ll claim innocent spouse relief by filing Form 8857 separate from your taxes. This says that you knew nothing about the excess income. Moreover, the liability belongs to your ex-spouse rather than you, and you aren’t the one who skewed the tax results.
The IRS most often grants innocent spouse relief to people who are no longer married to the person who committed the infraction. To approve your claim, the government will need to agree that it would be unfair to hold you liable for the tax understatement.
Caveats to Innocent Spouse Relief
There is a statute of limitations in place that will determine how long you have to file for innocent spouse relief. In most cases, it’s two years from the date that the IRS first tried to collect the tax liability from you. This is to help prevent fraud and ensure a timely response.
One more consideration to keep in mind?
Filing for this form of relief gives the IRS permission to contact your spouse and bring him or her in on the process. While that may not be an issue, it can be challenging for others, especially those in situations of domestic abuse. Consult with a tax professional before moving forward to make sure this is a valuable route to pursue.
Consequences of Fraud
As you may suspect, it is common for spouses to lie when filing an innocent spouse relief claim. They may say they had no idea of their spouse’s dishonesty when they played a real role in it from the beginning.
If you’re considering this route, don’t do it. You can face serious penalties, including up to five years in prison, for lying on your tax return.
Plus, even if you’re being honest and you didn’t know what was going on, you could still face those same penalties. This is one of the major disadvantages to filing together: You face the same consequences for foul play, even if one party is innocent.
The government recognizes any misrepresentation as tax fraud. If the IRS suspects that you or your spouse were less than forthcoming when you filed they could take a few actions.
First, they may audit either one of you. An IRS tax audit includes a thorough review of your taxes, along with all financial records dating years into the past. This can be a lengthy and expensive process and can even involve face-to-face interviews.
If you’re faced with an audit, it’s wise to seek professional counsel to ensure you’re protected during the process.
The IRS can also charge you a late penalty for your misrepresented taxes (even if you paid them on time), along with accrued interest. Other fines for fraud can add up to more than $250,000!
Injured Spouse Relief
What distinguishes an injured spouse from an innocent one? Here’s the scenario.
You’re an injured (not innocent) spouse if you file your taxes together and you’re set to receive a refund on your share. However, you’re denied all or a portion of it because you filed jointly and that money has to go toward paying down your spouse’s overdue federal liability.
Some of these overdue payments may include:
- Child support
- Federal debts (student loans)
- Federal taxes
- State taxes
- Spousal support
- State unemployment compensation
How does the IRS find out about these missed tax liabilities? When you file together with your spouse, you both receive tax ID numbers. His triggers an alert in the system that affects your entire combined refund.
For instance, say you marry someone who already has a young child and is paying child support payments every month. He missed a few months and those payments are still outstanding.
Come tax season, you choose to file a joint return. Based on your numbers, you expect a refund. However, during the filing period, the IRS notices your spouse’s tax ID number and instead, offsets the whole refund to pay down those existing debts.
This is unlike seeking innocent spouse relief, as there isn’t deception at play. Rather, it’s your spouse’s past that’s costing you big time. You’ll know that the IRS applied your return to these overdue debts when you receive a Notice of Offset letter in your mailbox.
When you receive that letter and want to rebuke it, it’s time to begin the injured spouse relief claim process. You’ll begin this process by completing Form 8379 separate from your taxes. The IRS can take up to 14 weeks to respond to your request, so be patient.
Determining Your Amount
While it would be nice to file for injured spouse relief and get 100% of the tax refund you deserve, it doesn’t quite look that way.
Instead, the IRS will apply a formula to your situation.
The government will look at the taxes you filed jointly together and instead, consider them as separate and individual returns.
To make sure these numbers are accurate, you and your spouse will both need to fill out your own tax forms. On them, you’ll report the following data:
- Your wages
- Any applicable self-employment income and tax
- Your expenses
- Any credits such as those for education
Remember, you aren’t considering your spouse’s wages, expenses or credits. This information is on a personal basis. From there, the IRS will determine the refund you’re set to receive.
Keep in mind that it won’t always be a 50/50 split. Although there will be many entities that you and your spouse report on your own, you may also share some assets. For example, you may share a joint bank account, and the IRS will split the interest gained on it down the middle.
Community Property States
Some states in the U.S. have their own rules regarding injured spouse relief. These include:
- New Mexico
If you live in one of these states, the government follows the rule that all assets you and your spouse obtain during your marriage become shared property moving forward.
This can affect the size of return that you get back even after seeking injured spouse relief, as you’ll have fewer individual assets to claim. For more information on these regulations, refer to IRS Form 555: Community Property.
Find Injured Spouse vs Innocent Spouse Relief
Any time money and relationships combine together, there’s the potential for complications to arise.
If you’re feeling the financial strain of covering for your spouse’s tax infractions, help is only a phone call away. Whether it’s an outstanding debt you knew about or an instance of dishonesty that you were unaware of, you’re entitled to a break.
Still confused by the injured spouse vs innocent spouse relief categorization? That’s why we’re here.
We’re an experienced team of tax professionals who have made it our mission to make processes like these simpler and easier to navigate. We’ll walk you through even the most complicated processes, making sure you complete all the required steps.
Contact us today with any questions and let’s reclaim your financial future.