Q: I'm a New York resident in the process of getting a divorce. Due to an order of protection, my husband was ordered out of the house in September. My question to you is about filing a 2008 tax return. Do I file married filing separately or jointly? (I have been paying the mortgage on our second vacation house, and I make significantly less than my husband.) If we do file jointly, do we split the refund? -- PV via email
A: Don't make this decision without consulting both your divorce lawyer and your tax accountant -- and don't make it on financial grounds alone. It's possible that filing a separate return will result in a higher tax bill. But even if that turns out to be the case, do you really want to file a joint return with someone you had to have ordered out of your house for your own protection?
That said, here's a rundown of the financial and legal factors to be considered:
A married-filing-separately tax status usually results in a higher tax bill than a joint filing. But ask your accountant to run the numbers for you. In your case, filing separately might actually save you money by letting you report a much smaller income and claim bigger deductions.
When you file jointly, you have to share deductions, says Alan E. Weiner, senior tax partner at Holtz, Rubenstein, Reminick in Melville -- but if you file separately, you can claim all the payments you made on the vacation house. And as a separate filer, you wouldn't have to share the refund, if there is one.
Filing separately also makes sense if you suspect that your husband underreports his income. Signing a joint return exposes you to prosecution by the IRS. True, you can avoid liability as an innocent spouse who didn't know he was lying -- but the success of that defense depends partly on the circumstances, says Stephen W. Schlissel, a Garden City divorce attorney. It's unlikely to fly, for example, if your joint return claims a $100,000 income and you live in a $4 million house.
Schlissel says that even if the IRS doesn't challenge a joint tax return that understates your husband's income, it could result in reducing your divorce settlement. Let's say the tax return states that he makes only $100,000, although he really makes much more. If you sign that return, you may be precluded from claiming in divorce court that his income is more than $100,000.
"No one in the midst of a divorce should sign a joint tax return without first obtaining an indemnification letter from his or her spouse," Schlissel says. "The indemnification letter states that neither party in the divorce litigation is bound by what's on the tax return. It also addresses what happens if one party lied in underreporting income or overstating deductions."
Of course, the IRS isn't a party to this agreement. If your joint tax return understates income, the government comes after both of you. But an indemnification letter would give you grounds to sue your former spouse to recover any additional taxes, interest, and penalties the IRS demands from you as a result of his lies.
The indemnification letter also addresses how the couple will handle any additional taxes due or refunds arising from their joint return. In 99% of divorce cases, Schlissel says, the parties agree that any tax refund will go into an escrow account pending the divorce settlement.
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