A woman going through a divorce thinking about dividing the tax debt.
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The division of tax debt during a divorce depends on when the debt was incurred, state laws, and other factors. Responsibility for back taxes may be shared or assigned to one spouse, often based on whether the debt arose before or during the marriage. However, IRS rules may not align with a divorce court’s decision. A financial advisor can help you clarify your tax obligations and prepare you for potential financial impacts.
When dividing debt in a divorce, courts look at the type of debt and when it was incurred. Debts incurred during a marriage are often considered shared, making both spouses responsible.
Debts from before the marriage are usually treated separately and each spouse is responsible for their own obligations.
Tax debt usually receives the same treatment. Whether the debt was accrued jointly or individually and whether it occurred during the marriage are important factors in determining liability.
How tax debt is divided depends on whether the state follows community property laws or equitable distribution principles. In community property states, marital debts, including tax debt, are generally divided equally between spouses, regardless of income or contributions. The nine community property states are:
Arizona
California
Idaho
Louisiana
Snowfall
New Mexico
Texas
Washington
Wisconsin
In community property states, courts can decide that both spouses share responsibility for any tax debt incurred during the marriage. This means that debt is typically divided equally, regardless of differences in income or contributions.
In equitable distribution states, tax debt is divided based on what the court considers fair, not necessarily equal. Factors such as each spouse’s financial situation, earning potential, and contributions to the household are considered. As a result, one spouse may be assigned a larger portion of the tax debt. This approach applies in all states except the nine that follow community property laws.
A divorce settlement can assign tax debt to one spouse, but the IRS can still hold both spouses responsible for the tax debt if they filed a joint return during the marriage. Even if a divorce decree states otherwise, the IRS can demand payment from either party.
To reduce this risk, individuals can seek innocent spouse relief from the IRS. This provision exempts the spouse from liability for tax debt if your ex-spouse incorrectly reported or omitted income on a joint tax return without your knowledge.
To qualify, the applicant spouse must demonstrate that he or she was unaware of the errors and that it would be unfair to hold him or her responsible. The IRS considers factors such as financial involvement, personal benefit, and financial circumstances.
To apply, individuals must submit IRS Form 8857, explaining their situation and including supporting documents. The IRS will review the application, considering the couple’s financial details and communication during the marriage.
A woman researching tax laws for divorce settlements.
Separating the hold harmless allows joint filers to split responsibility for understated tax liabilities between themselves and their former spouse.
The IRS assigns each spouse a portion of the tax debt based on their individual contributions and circumstances, offering a way to separate financial responsibility after a divorce or separation.
Unlike innocent spouse relief, this option is only available to those who are divorced, legally separated, or have lived apart from their spouse for at least 12 months.
To apply for separation of liability relief, individuals must file IRS Form 8857. The IRS will review the application, considering factors such as each spouse’s financial contributions and their participation in the tax filing process.
Equitable relief is available to individuals who face unfair tax liabilities due to the actions of their spouse or former spouse, even if they were aware of the errors. This type of relief covers both understated tax liabilities and unpaid taxes, offering broader protection compared to other forms of relief.
This is different from the separation of liability exemption, which divides tax debt between spouses. Equitable compensation applies when holding one spouse responsible would be unfair.
To qualify, the applicant spouse must demonstrate that holding them responsible for the tax debt would be unfair under the circumstances. The IRS considers factors such as financial hardship, the applicant spouse’s current financial situation, and any evidence of abuse or deception by the other spouse.
To request equitable relief, you must file IRS Form 8857. This form will allow you to explain your situation and provide evidence to support your case.
A man comparing community property versus equitable distribution states.
Dividing tax debt in a divorce can be difficult, especially with joint tax returns and IRS rules. Options such as innocent spouse relief, separation of liability, and equitable relief can help avoid unfair liability for an ex-spouse’s tax debt. A tax professional can guide you through these options.
A financial advisor can help you optimize your investments for taxes. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with vetted financial advisors serving your area, and you can take a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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