October 05, 2015
Estimated Taxes & Overpayments for Divorcing Couples
By Kristen Duplin, Tax & Business Services Senior
The last thing on the minds of divorcing couples is, most likely, taxes. However, this is something that should not be ignored, particularly in regard to the final financial terms of the divorce agreement. One key issue that should be considered is the question of which spouse will get the credit for estimated tax payments and overpayments applied from the previous jointly filed return.
When a couple has been filing joint tax returns and then files separately in the following year due to a divorce, the estimated tax payments are credited to the first person listed on the prior year's joint tax return (the "taxpayer"). The IRS has guidelines on how to deal with this issue, but actually leaves most of the decision-making up to the couple, regarding how the payment amounts will be allocated.
The IRS allows both parties the ability to divide the estimated tax payments based on agreement. If the couple cannot agree upon a solution, tax payments will be split in proportion to each party's respective tax, as reflected on his or her current year, separately filed tax return. This calculation can pose a challenge to many divorcing couples due to lack of communication during the divorce proceedings, or the timing of filings before the calculations can be completed.
The IRS's guidance for overpayments uses similar logic as that of the estimated payments. The overpayments should be credited against the liability from the taxpayer who made the overpayment. If the overpayment is from tax being paid by both spouses, the overpayment should be apportioned to each spouse proportionate to their respective tax obligations in the current year of filing separate returns.
The guideline is not entirely clear cut, however. The IRS system allocates the overpayments to the primary "taxpayer" who was listed on the joint returns from previous years. The same is also true for estimates made. The IRS internal system posts payments and overpayments to the primary social security number on the voucher.
One solution, to avoid IRS notices to both the taxpayer and spouse, is to include all of the overpayments and estimates on the "taxpayer's" return. This will then require an adjustment of the split of marital assets to the "non-taxpayer" spouse, which may include calculations of interest and penalties on the spouse's return. If this is not possible or is undesirable, both returns should include attachments explaining how the tax payments and overpayments are being allocated. Both parties will likely receive notices from the IRS in this case, which typically, can be easily resolved by your CPA.
The above solutions work well in amicable divorces; however, in non-amicable situations, the allocations can be very complicated. As an example, if the taxpayer files first and claims all payments, there may not be any payment funds remaining for the spouse to pay his or her tax liability.
Until the IRS develops a form to handle the issue of allocating tax payments and overpayments applied, payment allocation among divorcing parties will continue to be a problem.
If you find yourself in this situation, you should contact your Marcum Tax Advisor for assistance.