Tax Tips: Marriage, Divorce and Reporting

Getting married, losing a spouse, or getting divorced can impact federal income tax reporting in a variety of ways. Application of certain rules may suggest taking certain actions.

Marital Status

For federal income tax purposes, marital status for filing purposes depends on the status on Dec. 31 (Reg. ' 1.6013-4(a)). Thus, someone who has been married for the entire year but whose divorce is final on Dec. 31 is treated as single for the entire year. Similarly, anyone who marries on the last day of the year is treated as married for the entire year. An interlocutory decree or any court intervention in a family matter is not a final decree and does not affect marital status for tax purposes (Hill, Jr., TC Memo 1983-112).

When a spouse dies during the year, the surviving spouse is allowed to continue to use joint filing status for the year of death as long as the surviving spouse did not marry before the end of the year and the executor does not object (Reg. ' 1.6013-1(d)(4)). This enables the surviving spouse to use the standard deduction and tax rates for joint filers.

Note: Under the Defense of Marriage Act of 1996 (P.L. 104-199), marriage for federal income tax purposes does not include civil unions (see e.g., Mueller, TC Memo 2001-274, aff'd CA-7, 2002-2 USTC '50,505; cert. denied, 11/4/02). Whether same-sex marriages permitted in a number of states will be recognized for federal income tax purposes remains to be seen (the law defines marriage for purposes of federal laws as between one man and one woman).

Changing Withholding

When there is a change in marital status, it may require adjustments to withholding allowances so the proper amount of federal income taxes can be withheld from a person's paycheck. Someone with a change in marital status should consider filing a new Form W-4, Employee's Withholding Allowance Certificate, with the employer to indicate new filing status and changes in withholding allowances where appropriate.

Self-employed individuals may want to adjust estimated tax payments to account for their change in marital status.

Impact of Changes to Status

When a couple divorces, tax measures that were taken prior to the divorce can impact the parties after the dissolution of the marriage. Here are some situations that may require special attention:

Joint and Several Liability

A spouse who files a joint return is jointly and severally liable for the tax, interest, and penalties related to that return, even if the liability results from the other spouse or former spouse (Code Sec. 6013(d)(3)). This is so regardless of what a divorce decree or separation agreement says about liability for a couple's taxes on a previously filed joint return. The divorce instrument or any other tax indemnification agreement stating that one spouse is responsible for any taxes related to their finances while they were married may provide a cause of action between the parties, but the IRS is not a party to the agreement and is not governed by the instrument.

A spouse or former spouse who believes that the tax is owed by the other spouse may be able to avoid this liability by requesting innocent spouse relief (Code Sec. 6015). There are three types of innocent spouse relief:

• Innocent spouse relief, which is available for all joint filers;
• Separate liability relief, which applies only for those who have divorced or legally separated; and
• Equitable relief, which applies when either of the other types does not apply and it would be unfair to hold the applicant liable.

A request for relief is made on IRS Form 8857, Request for Innocent Spouse Relief.

Carryforwards

There may be various tax carryforwards of certain unused tax breaks that arose during the marriage, including capital losses, home office deductions, charitable contributions, and passive activity losses and credits. There may be net operating loss (NOL) carryovers and carrybacks from losses occurring during the marriage or after the marriage had ended. What happens to the carryforwards (and NOL carrybacks) after divorce? Does death have any impact? The answer may depend both on federal tax law as well as state family law.

Capital losses usually belong to the party who owned the assets that gave rise to them. If, for example, a spouse sold property that resulted in a capital loss and then died, the loss can be used only on the couple's final joint return. Any additional capital loss carryover cannot be used in later years by the surviving spouse.

In the case of divorce, however, the capital loss carryover may be treated as marital property subject to equitable distribution in states that follow this property settlement rule (see, e.g., Finkelstein v. Finkelstein, 701 NYS2d. 52, 54 (2000)). Other carryforwards, including those for charitable contributions and passive activity losses, may also be treated as marital property.

Net operating losses (NOLs) can be affected by a change in marital status. The IRS says that if spouses were not married in all years impacted by NOLs, then only the spouse who had the loss can take the deduction; the deduction is limited to the income of that spouse. For example, if one spouse dies and the following year, the surviving spouse has a net operating loss, the surviving spouse's NOL carryback can only be used to offset the income of the surviving spouse in the carryback years. When there is a change in marital status to single, the tax refund from a carryback year in which a joint return was filed is limited (Rev. Rul. 86-57, 1986-1 CB 362); there is a complex allocation process for determining the amount of the tax refund in this case.

Estimated Taxes

Frequently, couples make joint estimated tax payments. If the parties divorce during the year, which party gets credit for the previous payments? Either party can claim all of the joint payments, or a part of them as they agree. If they cannot agree on how to divide the payments, then the payments must be allocated in proportion to each spouse's individual tax as shown on separate returns for the year. If any joint estimated tax payments are claimed on a taxpayer's return after the divorce, the former spouse's Social Security number must be entered on the return (at the top of Form 1040, or, if the filer has remarried, then next to the entry for estimated taxes (with the notation “DIV“ to the left).

Tax Refunds

A tax refund arising from the filing of a joint return is payable to both spouses. However, problems can arise if one spouse cashes the couple's check or if the check is deposited directly into a joint account and then drawn on by one party. This raises the possibility of legal consequences (e.g., if one party forges the signature of the other); the IRS cannot remedy this problem.

Overpayments on a joint return can be used to pay past-due amounts of one spouse, including federal and state income taxes, child or spousal support, or student loans. If one spouse is entitled to some or all of the refund, a claim for recovery from the government can be made as an “injured spouse.“ This requires filing Form 8379, Injured Spouse Allocation.

Reporting Changes

The IRS uses data from the Social Security Administration to ensure that the name on a federal income tax return is correct. Therefore, when someone gets married and changes his or her name at that time, or is divorced and changes a name, the name change should be sent to the Social Security Administration. This can be done using Form SS-5, Application for a Social Security Card, from www.ssa.gov. The completed form, along with any documentation, such as a marriage license or a divorce decree, should be brought to a local Social Security office. Also, any change in address should be reported to the IRS. This will ensure that tax refunds and notices are sent to the proper address and are not misdirected. A change of address is made on Form 8822, Change of Address.

Various benefits are payable according to beneficiary designations. These designations usually survive changes in marital status (some states may override designations following a divorce, for example). For example, if a single individual had named a parent as beneficiary of an IRA and then marries, the parent remains the beneficiary; a new designation form must be completed to name the spouse as the beneficiary if desired. Similar action may be required for life insurance policies, qualified retirement plans (e.g., 401(k) plans), and annuities.

Sidney Kess, CPA-attorney, is a consulting editor to CCH Inc., an author, and a lecturer. This article originally ran in the New York Law Journal, an ALM sister publication of this newsletter.

Getting married, losing a spouse, or getting divorced can impact federal income tax reporting in a variety of ways. Application of certain rules may suggest taking certain actions.

Marital Status

For federal income tax purposes, marital status for filing purposes depends on the status on Dec. 31 (Reg. ' 1.6013-4(a)). Thus, someone who has been married for the entire year but whose divorce is final on Dec. 31 is treated as single for the entire year. Similarly, anyone who marries on the last day of the year is treated as married for the entire year. An interlocutory decree or any court intervention in a family matter is not a final decree and does not affect marital status for tax purposes (Hill, Jr., TC Memo 1983-112).

When a spouse dies during the year, the surviving spouse is allowed to continue to use joint filing status for the year of death as long as the surviving spouse did not marry before the end of the year and the executor does not object (Reg. ' 1.6013-1(d)(4)). This enables the surviving spouse to use the standard deduction and tax rates for joint filers.

Note: Under the Defense of Marriage Act of 1996 (P.L. 104-199), marriage for federal income tax purposes does not include civil unions (see e.g., Mueller, TC Memo 2001-274, aff'd CA-7, 2002-2 USTC '50,505; cert. denied, 11/4/02). Whether same-sex marriages permitted in a number of states will be recognized for federal income tax purposes remains to be seen (the law defines marriage for purposes of federal laws as between one man and one woman).

Changing Withholding

When there is a change in marital status, it may require adjustments to withholding allowances so the proper amount of federal income taxes can be withheld from a person's paycheck. Someone with a change in marital status should consider filing a new Form W-4, Employee's Withholding Allowance Certificate, with the employer to indicate new filing status and changes in withholding allowances where appropriate.

Self-employed individuals may want to adjust estimated tax payments to account for their change in marital status.

Impact of Changes to Status

When a couple divorces, tax measures that were taken prior to the divorce can impact the parties after the dissolution of the marriage. Here are some situations that may require special attention:

Joint and Several Liability

A spouse who files a joint return is jointly and severally liable for the tax, interest, and penalties related to that return, even if the liability results from the other spouse or former spouse (Code Sec. 6013(d)(3)). This is so regardless of what a divorce decree or separation agreement says about liability for a couple's taxes on a previously filed joint return. The divorce instrument or any other tax indemnification agreement stating that one spouse is responsible for any taxes related to their finances while they were married may provide a cause of action between the parties, but the IRS is not a party to the agreement and is not governed by the instrument.

A spouse or former spouse who believes that the tax is owed by the other spouse may be able to avoid this liability by requesting innocent spouse relief (Code Sec. 6015). There are three types of innocent spouse relief:

• Innocent spouse relief, which is available for all joint filers;
• Separate liability relief, which applies only for those who have divorced or legally separated; and
• Equitable relief, which applies when either of the other types does not apply and it would be unfair to hold the applicant liable.

A request for relief is made on IRS Form 8857, Request for Innocent Spouse Relief.

Carryforwards

There may be various tax carryforwards of certain unused tax breaks that arose during the marriage, including capital losses, home office deductions, charitable contributions, and passive activity losses and credits. There may be net operating loss (NOL) carryovers and carrybacks from losses occurring during the marriage or after the marriage had ended. What happens to the carryforwards (and NOL carrybacks) after divorce? Does death have any impact? The answer may depend both on federal tax law as well as state family law.

Capital losses usually belong to the party who owned the assets that gave rise to them. If, for example, a spouse sold property that resulted in a capital loss and then died, the loss can be used only on the couple's final joint return. Any additional capital loss carryover cannot be used in later years by the surviving spouse.

In the case of divorce, however, the capital loss carryover may be treated as marital property subject to equitable distribution in states that follow this property settlement rule ( see, e.g., Finkelstein v. Finkelstein , 701 NYS2d. 52, 54 (2000)). Other carryforwards, including those for charitable contributions and passive activity losses, may also be treated as marital property.

Net operating losses (NOLs) can be affected by a change in marital status. The IRS says that if spouses were not married in all years impacted by NOLs, then only the spouse who had the loss can take the deduction; the deduction is limited to the income of that spouse. For example, if one spouse dies and the following year, the surviving spouse has a net operating loss, the surviving spouse's NOL carryback can only be used to offset the income of the surviving spouse in the carryback years. When there is a change in marital status to single, the tax refund from a carryback year in which a joint return was filed is limited (Rev. Rul. 86-57, 1986-1 CB 362); there is a complex allocation process for determining the amount of the tax refund in this case.

Estimated Taxes

Frequently, couples make joint estimated tax payments. If the parties divorce during the year, which party gets credit for the previous payments? Either party can claim all of the joint payments, or a part of them as they agree. If they cannot agree on how to divide the payments, then the payments must be allocated in proportion to each spouse's individual tax as shown on separate returns for the year. If any joint estimated tax payments are claimed on a taxpayer's return after the divorce, the former spouse's Social Security number must be entered on the return (at the top of Form 1040, or, if the filer has remarried, then next to the entry for estimated taxes (with the notation “DIV“ to the left).

Tax Refunds

A tax refund arising from the filing of a joint return is payable to both spouses. However, problems can arise if one spouse cashes the couple's check or if the check is deposited directly into a joint account and then drawn on by one party. This raises the possibility of legal consequences (e.g., if one party forges the signature of the other); the IRS cannot remedy this problem.

Overpayments on a joint return can be used to pay past-due amounts of one spouse, including federal and state income taxes, child or spousal support, or student loans. If one spouse is entitled to some or all of the refund, a claim for recovery from the government can be made as an “injured spouse.“ This requires filing Form 8379, Injured Spouse Allocation.

Reporting Changes

The IRS uses data from the Social Security Administration to ensure that the name on a federal income tax return is correct. Therefore, when someone gets married and changes his or her name at that time, or is divorced and changes a name, the name change should be sent to the Social Security Administration. This can be done using Form SS-5, Application for a Social Security Card, from www.ssa.gov. The completed form, along with any documentation, such as a marriage license or a divorce decree, should be brought to a local Social Security office. Also, any change in address should be reported to the IRS. This will ensure that tax refunds and notices are sent to the proper address and are not misdirected. A change of address is made on Form 8822, Change of Address.

Various benefits are payable according to beneficiary designations. These designations usually survive changes in marital status (some states may override designations following a divorce, for example). For example, if a single individual had named a parent as beneficiary of an IRA and then marries, the parent remains the beneficiary; a new designation form must be completed to name the spouse as the beneficiary if desired. Similar action may be required for life insurance policies, qualified retirement plans (e.g., 401(k) plans), and annuities.

Sidney Kess, CPA-attorney, is a consulting editor to CCH Inc., an author, and a lecturer. This article originally ran in the New York Law Journal, an ALM sister publication of this newsletter.