Are You Sure You Want to File MFJ?
When a couple says “I do” they begin to share everything, from the household bills to cramped bathroom space. But is this always a good idea when it comes to filing taxes? Most of the time, married couples immediately begin filing jointly and don’t give the matter a second thought because it generally means lower tax bills. However, in certain cases couples and their tax advisors should take a closer look at their circumstances to determine if this really is the best option for them, or if it could actually create problems. Whether preparing your own return or the returns of others, sometimes it makes sense to look beyond the obvious and plan for that certain or potential liability.
Although filing a joint tax return usually means a lower tax hit, it also entails joint and several liability, meaning that both spouses are liable in full for any tax liability, regardless of which spouse the liability may be attributable to. This means that the IRS can collect any liability from either or both individuals. Under certain circumstances, the joint liability can be avoided if the parties have separated, or if the liability is attributable to one spouse and it would be inequitable to hold the other spouse liable. Pursing such “innocent spouse relief” can be a difficult and costly process, however, and there is no guaranty that any given facts will satisfy the IRS or the court to obtain such relief.
In situations where a tax return has questionable items or there is a high risk that a liability shown on the return won’t be paid, it may be worth filing separately from the outset to avoid any potential joint liability for an “innocent spouse.” To determine if filing separately may indeed offer some value, ask yourself:
- Is this a “high risk” return (i.e., is their a high likelihood of an audit leading to a significant deficiency)? Or, is the amount shown due on the return more than the couple can afford to pay?
- Would the couple, or one of the spouses, benefit if their share of the assets could be protected from liability for the taxes? Would there be extra value if such protection could be almost a certainty (instead of a possibility resulting from a fight over innocent spouse relief)?
If you answered yes to the above questions, you might consider whether the increased cost of filing separately is worth paying for the peace of mind in knowing that at least one spouse will not be liable and, with proper planning, that that spouse may be able to protect at least their own, and their portion of the couple’s, assets.
Whether preparing your own returns or those of others, sometimes it can make sense to look beyond the obvious and plan for a likely unavoidable liability.