Filing taxes is complicated, let alone when you’re going through a divorce. This annual task is made even harder when divorcing. A common question that arises during divorce proceedings is: Who gets the tax refund? Disagreements over refunds can raise tensions, especially if no clear agreement exists between the spouses. Understanding how joint tax returns and refunds are handled during a divorce is key to avoiding unnecessary conflict and ensuring a fair outcome.
Filing Status During Divorce
The way you file your taxes during a divorce has a significant impact on whether you receive a refund and how it’s handled. The filing status you use will depend on your marital status as of December 31 of that given tax year.
Determining Your Filing Status
If you are still legally married on December 31, you and your spouse can choose between:
- Married Filing Jointly (MFJ): Filing jointly typically results in the largest tax benefits, including higher deductions and credits.
- Married Filing Separately (MFS): Filing separately provides independence in tax reporting but comes with fewer deductions and often higher tax liability.
If your divorce is finalized by the end of the year, you must file as Single or, if you qualify, Head of Household, which provides better tax benefits than the Single status.
Impact of Filing Jointly vs. Separately
Filing jointly is often the preferred choice for couples in the middle of a divorce because it can maximize the refund. However, filing jointly also means both spouses share responsibility for any tax liability. On the other hand, filing separately can eliminate joint liability but often results in higher taxes and a reduced refund.
It’s important to weigh the financial and legal implications of each option when deciding how to file. Please discuss this with your spouse, as this author has seen missed refunds as a result of on spouse going “rogue” and filing their own without understanding the loss to the parties as a household.
Splitting a Tax Refund
Once the tax return is filed and a refund is issued, the next step is determining how to divide your refund fairly. The method used will depend on the specific circumstances of your financial situation and any agreements between you and your spouse.
How Refunds Are Typically Handled
One of the most common approaches is to split the refund based on proportional contributions. For example, if one spouse earned 70% of the household income, they may claim 70% of the refund, while the other spouse claims 30%. This method ensures fairness based on each spouse’s financial input during the tax year.
In some cases, divorcing couples agree to split the refund equally, regardless of income contributions. This approach is straightforward and can help avoid disputes, especially if both spouses were financially active during the marriage.
Addressing Disputes Over Refunds
When disagreements arise over how to divide the refund, it’s essential to resolve them as quickly and amicably as possible. Mediation is often an effective way to work out disputes, as it allows both spouses to collaborate with the help of a neutral third party. If mediation isn’t successful, legal counsel may be necessary to ensure a fair resolution.
Documenting agreements about tax refunds in writing is always a good practice to avoid future misunderstandings. Remember that it can go a long way to use your portion to pay another reimbursement you may owe to your spouse. Use this refund to build cooperation and future collaboration on money matters.
Managing Joint Tax Liabilities
Tax refunds are only one side of the coin. If taxes are owed, spouses must also address how to handle any liability resulting from filing a joint return.
Liability for Joint Returns
When filing jointly, both spouses are equally responsible for any taxes owed, even if one spouse primarily earned the income. This joint liability can become problematic during a divorce, especially if one party believes the other should bear the responsibility.
Options for Protecting Yourself
If you’re concerned about being held responsible for your spouse’s tax debts, you may qualify for Innocent Spouse Relief or other forms of tax relief. These protections are designed to shield one spouse from liability if that spouse truly has no knowledge of the liability that arose from the other spouses’ actions (or in action.) Sometimes that spouse may have provided inaccurate or fraudulent information on the tax return. Consulting a tax attorney or family law attorney is crucial if you believe you may need to pursue these options. Many CPAs specialize in handling the innocent spouse defense for the spouse to the IRS.
Handling Refunds When Divorce is Pending
When a divorce is in progress, tax refunds can be addressed in a few ways to minimize conflict and ensure clarity for both parties.
Temporary Agreements
Couples going through a divorce often create temporary agreements for handling financial matters, including tax refunds. These agreements specify how refunds will be divided until a final divorce settlement is reached. For example, a couple might agree to split the refund equally for the current tax year, regardless of income contributions.
Incorporating Refunds Into Divorce Settlements
In many cases, tax refunds are addressed as part of the overall property division during divorce negotiations. For example, if one spouse receives the full refund, the other spouse may receive other assets of equal value to ensure a fair division of property. Including tax refunds in the settlement agreement can help prevent disputes later on.
Tips for Avoiding Tax Refund Disputes
To ensure a smooth tax season during divorce, consider these best practices:
- Maintain Open Communication: Discuss tax filing and refund expectations with your spouse early in the process. Clear communication can prevent misunderstandings and disputes.
- Be Transparent About Finances: Share tax-related information, such as W-2s, 1099s, and deductions, to ensure both parties have a full picture of the financial situation.
- Plan Ahead: Decide in advance how the refund will be handled, whether through temporary agreements, proportional splits, or property settlements.
- Seek Professional Guidance: Work with a family law attorney or tax professional who understands the complexities of divorce and tax law. They can help you make informed decisions and protect your financial interests.
- Document Everything: Put any agreements about refunds, liabilities, or tax filing methods in writing to avoid future conflicts.
Tax season during a divorce can be a term upon which to build trust and cooperation if handled with that intention. By understanding your options, communicating openly, and planning ahead, you can ensure that tax refunds are handled fairly and equitably and in the best interest of the marital estate. Whether you’re filing jointly or separately, working with an experienced attorney can provide the guidance you need to make the process as smooth as possible.
Our experienced family law attorneys in Arizona will work in concert and will incorporate the Parties’ tax expert and tax preparer’s recommendations in all legal documents that require it and will not and does not provide any tax advice. The information provided here is for general understanding only of the tax implications that arise after divorce. If you’re going through a divorce contact McMurdie Law & Mediation today for a personalized consultation, or call us at (480) 777-5500.