California Divorce and Family Law

Roses, Candy and Taxes: Tax Effects of Marriage, Divorce Life Changes Can Have Major Tax and Financial Implications

Whether you’re tying the knot or severing the tie, Valentine’s Day is a natural time to examine the tax implications of marriage and divorce. H&R Block offers these tax tips if you’re considering one of these life changes.

More than just wedding gifts and thank you notes, marriage also means planning for a joint financial future, including how the couple’s tax situation has changed: Marriage means choices.

The IRS allows married couples to file using the “married filing jointly” or “married filing separately” status. Each has advantages that can be difficult to sort out. For example, if you claim medical expenses or other itemized deductions that are limited by your adjusted gross income, filing separately may be the way to go. But if you want to claim most tax credits or deduct your IRA contribution, you’ll probably need to file jointly. Consult your tax professional to determine the right choice for your first time filing together.

Social Security numbers don’t change, but anyone who has changed their last name will need to apply for a new Social Security card. If the name and number don’t match, the IRS might delay processing of the return, which means a refund could take longer than usual to arrive.

Marriage also means adjusting retirement savings. Besides changing filing status on an employer’s 401(k) account, newly married taxpayers also should consider increased limits for tax-deductible IRA contributions. If the couple’s income meets certain limits, they could qualify for more of a deduction. In some scenarios, one spouse also may “borrow” from the other’s earnings to meet the limits.

Inform the IRS of a new address. If the IRS does not have the correct address on file for a newly married couple, it could take longer for a refund to arrive. Taxpayers shouldn’t count on mail to be automatically forwarded and should consider filing Form 8822 to inform the IRS.

Divorce also can change a taxpayer’s financial situation. The best advice is to understand the divorce agreement and its terms, especially key components that could complicate a tax return.

Alimony is taxable and deductible. The person who provides alimony can claim the payments as a deduction, while the person who receives it can avoid a large end-of-year tax bill by paying estimated taxes during the year. Unlike alimony, child support is not deductible or taxable.

Who claims children? The parent who has custody of a child usually can claim the child as a dependent. However, with the custodial parent’s consent, the parent without custody can claim the child. (The custodial parent may still be able to claim certain tax benefits related to the child, including head of household filing status, the Earned Income Tax Credit, and the child-care credit.)

Who is a head of household? There are several factors for determining the head of a household. A few include being considered “unmarried” on the last day of the year, having children or other dependents who live with you, and paying more than half the cost of providing a home for dependents. Taxpayers should consult with a tax professional to determine if they qualify for head-of-household status.

Divorce, annulment and legal separation are considered the same by the IRS for tax purposes. The way a tax return is affected by the situation depends on how the decree is worded, and in cases where state and federal law differ, the IRS will side with the federal government.

This article from dBusinessNews.

Deductibility Of Attorneys' Fees In Connection With Divorce

It’s that time of year again. Of course, the general rule is that lawyers’ fees and costs in connection with obtaining a divorce are not tax deductible. As with many general rules, there are exceptions:

1. Attorneys’ fees related to tax advice. I.R.C. §212(3). Areas having tax implications upon which an attorney may offer advice include the tax effect of the distribution of property, including retirement plans, tax deductibility of interest payments or installments to effectuate an equitable distribution of property, the allocation of the dependency exemption and child tax credit, whether a joint tax return should be filed, the tax effect of unallocated maintenance and child support, the tax implications of the form of alimony, and advice regarding the recapture of front end loaded maintenance in the first three years following separation.

Practice tip: it is not helpful for the client wishing to tax deduct some attorney fees to have a provision in the marital settlement agreement that no tax advice was given.

2. Attorneys’ fees related to the production or collection of taxable income may be deductible. I.R.C. §212(1). For example, the payee of taxable alimony may be entitled to a deduction for attorney fees in generating the production or collection of this taxable income and fees in connection with securing an increase in taxable alimony may also be deductible. Attorney fees for obtaining income producing property are not deductible, but could arguably be added to the tax basis of the property.

A taxpayer may deduct only fees paid to his or her own attorney, unless the fees of the other party are paid as alimony.

Any attorneys’ fees that are legitimate income tax deductions are deductible only to the extent that all of the miscellaneous deductions in the aggregate exceed 2% of the taxpayer’s adjusted gross income. There is also an “applicable amount” which may reduce the otherwise allowable deduction.

Lawyers must be very careful not to overstate the amount or portion of attorneys’ fees that relate to tax deductible advice or legal efforts. I.R.C. §6701, Penalties for Aiding and Abetting Understatement of Tax Liability.

From Diana Skaggs and the Divorce Law Journal.

Tax Court Denies Dependency Deduction for Non-Custodial Parent Because Taxpayer Did Not Include a Signed Form 8332 With His Return

The tax consequences of separations can impact a number of areas. One such area is the deduction for dependents.

In Smith v. Commissioner, the United States Tax Court (Tax Court) addressed the issue of whether the taxpayer, a non-custodial parent, could claim the dependency deduction. The Tax Court also addressed whether the taxpayer could claim the child care credit, child tax credit, and earned income credit.

The taxpayer had a biological child with a woman (mother) that he never married. During the year in question (2003), the taxpayer and the mother did not live together and the son lived with the mother and her husband during the majority of the year. The taxpayer and the mother did not have a written agreement regarding who could claim the child as a dependent. Both the taxpayer and the mother claimed the child as a dependent and the IRS denied the taxpayer's dependency deduction, as well as other child-related credits. The taxpayer did not attach to his 2003 return a Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents) or similar statement.

Deduction for Dependents: A taxpayer is generally allowed a deduction for each dependent (see IRC section 151). A dependent includes a son or daughter of the taxpayer in which the taxpayer provides over half the support during the year (see IRC section 152).

Divorced or separated parents: A child that receives over half its support from parents that are divorced, separated or live apart during the last six months of the year is treated as receiving over half the support from the parent that had custody for the greatest part of the year. The non-custodial parent may claim the dependency deduction if the individual files Form 8332 or similar statement that the custodial parent will not claim the child as a dependent.

Court Decision: The Tax Court held that the taxpayer was not entitled to the dependency exemption deduction since he was a non-custodial parent (i.e., did not have custody over half of the year) and did not attach Form 8332 to his return.

The Tax Court also denied the child care credit and child tax credit since those credits require that the taxpayer satisfy the dependent requirement under section 151. Lastly, the Tax Court also denied the earned income credit because the child's principal place of abode was not with the taxpayer for more than half the year.

Read it all at Family Law Taxation blog.

It's Tough to Deduct Divorce Costs as a Small-Business Expense

QUESTION: I own my own business. Recently, I divorced my wife. During the proceedings, there was a heated argument over whether or not my ex-wife was to receive a portion of it. In the end, the business was considered mine completely and she received nothing from the business.

Can I claim the legal fees on my tax returns, due to the fact that my business became part of the divorce?

ANSWER: Well, we checked. "Unfortunately, it doesn't sound like it," says Joseph R. Kluemper, senior tax manager at BDO Seidman in New York. "The general rule is that attorney fees related to divorce are nondeductible." Basically, the Internal Revenue Service sees your divorce as a personal matter, even though the end of your marriage had significant business implications.

There's one loophole that might work for you. Did any part of the legal discussions have to do with tax advice? Perhaps your lawyer outlined the potential tax consequences of splitting the business with your ex-wife. If that's the case, you can always deduct fees related to tax-planning advice as a miscellaneous deduction, as long as the fees exceed 2% of your adjusted gross income. The best way to handle this is to request a detailed billing statement from your attorney, which would separately itemize any deductible services that involved tax advice, says Leon Finkel, partner at Chicago divorce firm Berger Schatz.

Incidentally, in case you thought of this, you couldn't have paid the attorney's fees through the business and then written that off as a business expense. You're entitled to deduct a number of small-business costs — things like office supplies, insurance premiums and retirement contributions — because they are "normal and ordinary" (the IRS's litmus test) in your line or work. A divorce (we hope) doesn't meet that definition.

One last thing: Be thankful your business has survived the divorce. Many businesses — especially those in which both spouses are heavily involved in day-to-day operations — aren't so lucky. In some rare cases, divorced entrepreneurs remain together for the sake of the business. It sounds like you've kept your business while closing a chapter on your past — so you've likely come out ahead, even if it's not tax-deductible.

Today's Q & A from Smart Money.

Exemption hinges on custody time

Q. My divorce degree lets my ex-husband claim one of our two children on his tax return even though they both live with me. Since my ex-husband is behind on paying child support, can I claim both children?

A. Being behind on child support payments does not typically affect the right to claim a dependency exemption for a child.

With divorced taxpayers, the general rule is that the parent with custody of the child for the greater part of the year receives the dependency exemption as long as the child does not provide more than one-half of his or her own support. If a child spends an equal amount of time with each parent, the parent with the higher adjusted gross income will receive the dependency exemption.

Of course, there are exceptions to this general rule. One such exemption is with pre-1985 divorce decrees or separation agreements between parents, which grants the noncustodial parent the dependency exemption. In such a case, the noncustodial parent receiving the dependency exemption must provide at least $600 of support for the child during the year. The other exception to the general rule is when the custodial parent releases the right to claim the dependency exemption for a child to the noncustodial parent.

This transfer is granted by the custodial parent signing a written waiver. Generally, IRS Form 8332 is used for these purposes and must be attached to the noncustodial parent’s tax return for each year a dependency exemption for the child is claimed. The divorce decree can also be used if it addresses specific issues required by the IRS. Additionally, for the noncustodial parent to claim the child on his or her tax return, the child must receive over half of his or her support for the year from one or both of the parents.

Public assistance payments, such as Temporary Assistance for Needy Families, are not considered support provided by the parents. Also, the child must have been in the custody of one or both of the parents for more than half the year. IRS Form 8332 or a similar statement can be used to release the claim of exemption for a child for the current year, specific future years or all future years.

Your divorce decree, if specifically worded, can serve as an equivalent statement in lieu of Form 8332, and your ex-husband can use it to claim the dependency exemption.

To serve as your release of the exemption for one of your children, your divorce decree or agreement must include all of the following information:

•The noncustodial parent can claim the child as a dependent without regard to any condition (such as payment of support).

•The other parent will not claim the child as a dependent.

•The years for which the claim is released.

Q & A from the Kansas City Star.

Tax errors in divorce agreements are costly: Here's how to avoid them

Despite a divorce agreement that specifically said neither party shall pay or receive alimony, one reader, Divorced in New York, was hit with a $5,000 tax bill from the Internal Revenue Service for some phantom alimony.

Even though the IRS had a copy of the divorce agreement in hand, the agency insisted on assessing the taxes. Why? Because this woman's ex-husband presented canceled checks to prove he made payments to her in the amount reported as alimony.

The IRS didn't really care that it wasn't alimony. What were the payments? They were her portion of his monthly pension, as granted to her in the divorce. Unfortunately, the state was sending the money to Divorced's ex-husband, with the withholding already pulled out, and he was sending to her half of the net. Then, on his tax return, the ex-husband was deducting his full payment as alimony, and pocketing her share of the refund.

This problem could have been avoided if the attorney had set up a QDRO, says Patricia Powell, a certified financial planner and chief executive of The Powell Financial Group Inc., in Martinsville, N.J.

What's a QDRO? A qualified domestic relations order. Properly prepared, it instructs the pension plan to issue a check directly to the ex-wife for her share of the income.

With a QDRO, an ex-spouse can decide whether to get a lump sum rolled over to her IRA, cash it out and pay taxes, or continue to get monthly payments. She can designate how much she chooses to have withheld from her check. And, getting credit for her full share of the withholding, if Divorced had reported the pension income properly on her own tax return, she would have owed no tax.

This is a typical error when couples indulge in do-it-yourself divorces, said Lynne Gold-Bikin, chair of the family law practice group at Wolf, Block, Schorr and Solis-Cohen LLP in Norristown, Penn. Even seemingly simple divorces are more complex than they appear. They involve knowledge of both divorce law and tax law. Gold-Bikin says that if you're not a tax-law expert, you should get one to review the divorce agreement and settlement.

If your divorce doesn't get a tax tune-up, what kinds of errors are apt to occur? Here are some common problems.

Deceptive equality Often, assets appear to be evenly split based on fair market value. Everything looks all nice and equitable, but one person just got stuck with all the taxable assets, while the other walked off tax-free, warns Powell. One of the biggest traps for women, especially mothers, is that they often give up their right to practically everything in order to keep the house and avoid moving their children.

Here are some tax rules to consider:

Pensions, 401(k)s and IRAs are taxed at ordinary income rates. With the high distribution added to your other income, this can throw you into the top tax bracket of 35%.

Stocks and investments often get long-term capital gain treatment - limited to 15%.

The house looks like a good deal with that $500,000 personal residence exclusion. But once your ex signs it over to you, you've instantly lost half that cushion. If the appreciation on your residence is substantially more than the $250,000 personal exclusion, Powell advises you sell the house while you're still married and can use the full $500,000 joint exclusion. Then, split the money and buy your own home in the same neighborhood, which will now have a higher tax basis (basis is the cost, for tax purposes). Note: In most states, property tax keeps up with the increasing market value of the home. In California, due to Proposition 13, property taxes are based on the original purchase price. Before you do this in California, run the numbers to see whether the increased annual property tax payments on the new home might cost you more than the potential capital gains tax.

Cash is valued at face-value for tax purposes - there is no tax on cash! How can you avoid the problem of "deceptive equality"? Powell suggests you sell off the assets with the high tax values and split the cash.

Or if that's impractical, balance the split based on the tax costs. Have your certified financial planner or tax professional review the assets' tax bases to help you reach a truly equitable split.

The vanishing alimony trick Alimony recapture can be a common problem, cautions Gold-Bikin.

IRS Publication 504 explains what the recapture is: "You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year."

Why is this recapture needed if the divorce agreement is properly drafted? Gold-Bikin said this often happens when the alimony payments aren't made on schedule. If several payments are missed in one year, then made up in another year, it's easy to see that $15,000 swing take place. Or if payments are stopped altogether and there haven't been three years of regular alimony payments, that would also trigger the recapture.

Why does this matter? Because the person paying the alimony will lose the deduction. And the person who received the money may go back and file amended returns for all the alimony years - and get refunds. Read that last sentence again if you're dealing with a deadbeat former spouse. You may have a refund coming!

How can you avoid this problem? Gold-Bikin recommends you adhere to the alimony payment schedule.

Vague assignments When the divorce decree awards family support without spelling out which part is for child support and which is for spousal support, it's all taxable to the recipient as alimony, and deductible to the payer, says Gold-Bikin. This the result of a 2005 Tax Court decision in Berry v. Commissioner.

How can you avoid this problem? Spell out how much of the support is designated for each child, and how much is spousal support.

Tax benefit tug-of-war One of Gold-Bikin's pet peeves is couples who fight over every smidgen of the tax benefits related to exemptions for their children, even when their income level causes them to lose those benefits.

Hope and Lifetime Learning Credits start to phase out for single or head-of-household filers when their adjusted gross income hits $45,000 and is eliminated entirely for those filers when AGI exceeds $55,000.

The deduction for student loan interest starts to phase out for single or HOH filers with adjusted gross income of $50,000, and is completely eliminated for those with AGI exceeding $65,000.

The child tax credit is lost when HOH income reaches $75,000.

Itemized deductions start to phase out at $150,500 for singles, HOH and married filing jointly Personal exemptions phase out at incomes of $188,150 to $310,650 for HOH.

Landing in tax debtor's purgatory You probably know and pity many people who are stuck with divorce tax debt, and you wonder how they could have been so foolish, or trusting. They sign a joint tax return, even though they're getting divorced because they no longer trust each other. And they know better. But, "He promised to pay the whole tax!" is the usual refrain. Of course, he doesn't.

Powell says she's seen the most compelling and seductive behavior watching couples during divorce. The initiator of the divorce goes into courting mode, implying cooperation, an easy transition, or even a reconciliation - all the while, planning his/her wedding to someone else.

They effectively blindside their about-to-be ex into agreeing to practically anything, even to signing a joint tax return, when every fiber of their being is warning them away from this. If you must sign that return, perhaps because it will reduce your own share of the tax liability, how can you best protect yourself? Gold-Bikin says it's as easy as 1-2-3

Get an indemnification letter as part of the divorce, making your ex responsible for his/her share of all taxes. And be sure that indemnification letter includes specific instructions for how any refunds are to be allocated. While IRS may not honor the agreement between the two of you, it does give you a basis to sue your ex, if you're ever stuck paying his or her share of the tax.

Don't ever sign a balance-due tax return without getting a certified check to pay your ex's share in full. Don't rely on promises from your ex or his/her attorney. They're rarely fulfilled. If there is a refund coming, use IRS's new Form 8888 that allows you to have the refunds split up in any pre-determined allocation, and deposited directly to two different bank accounts.

Tune in, not out There are many, many more traps a divorcing couple can fall into. But, you're starting to get the idea. Even the simplest-seeming amicable divorce may have far-reaching financial implications.

Sweat the details, and don't just give up everything to get it all over with. You might think it's worth the price at the time because you're feeling emotionally out of control. Later, you'll realize just how badly you've been fleeced, and will spend years lamenting your decisions. If you can't face up to making the hard decisions, get a trusted family member or friend to work with you and your attorney, someone who can protect your interests.

Read it all in The NY Daily News.

Noncustodial parents can get some tax breaks

Q: My divorce decree says that my wife gets custody of the kids and that I get to claim them as dependents on my taxes. If my ex-wife signs the form each year that lets me claim the kids as dependents, can I also file as head of household? Are there any other tax benefits I can get by claiming the kids as dependents?

A: As a noncustodial parent, you can't file as head of household, even if you can claim your kids as dependents. You can't get the earned income tax credit, either. But if your ex-spouse lets you claim the kids as dependents, you can claim the child tax credit, which could reduce your taxes by up to $1,000 per child.

The custodial parent is ordinarily entitled to claim the kids they care for as dependents for tax purposes. Each dependent is an exemption that reduces the tax filer's income by $3,300. That income reduction translates into a tax reduction of $330 to $1,155 per dependent.

The custodial parent can waive the right to claim the kids as dependents and let the noncustodial parent claim them. The best way to do that is with an IRS Form 8332. It has a line where the custodial parent can sign and date the statement, "I agree not to claim an exemption for _____ for the tax year 2005."

The custodial parent can waive the dependent exemption each year, or for a number of years. The noncustodial parent files the 8332 Form with his or her taxes, and is thereby entitled to claim the children as dependents. That does not, however, entitle the noncustodial parent to file his or her taxes as a head of household.

The requirement that heads of households care for their kids at least six months out of the year cannot be waived. Because only heads of households can get the earned income tax credit, and noncustodial parents can't be heads of households, noncustodial parents can't get the earned income tax credit.

While being able to claim kids as dependents doesn't entitle a noncustodial parent to file as head of household, it does entitle him or her to claim the child tax credit. That credit runs with the dependent child, so whoever claims the kid as a dependent gets it.

Thanks to the St. Louis Post-Dispatch.

Tax implications grow with divorce

Well. it is that time of year--we all have to file our taxes. The following from the Oklahoman is helpful tax information for those of us who are divorced.The article also includes some rules relating to alimony (spousal support) and deductibility of tax advice for your divorce.

For starters, many people who receive alimony from their ex-spouses often have no idea -- until it's time to file their tax returns -- that they have to pay taxes on the alimony.

"It's the biggest pitfall in divorce cases," Oklahoma City tax attorney Ken Klingenberg said. Even if divorcees are told alimony is taxable, it often doesn't register, he said. "Maybe because of the emotional stress they're under, people ignore it," Klingenberg said. Consequently, they forget to set aside roughly 30 percent of their alimony for the taxes due.

In general, spousal support ordered under divorce decrees is taxable to receivers and tax-deductible for payers. The Social Security numbers of recipients must be included on payer's tax return.

Meanwhile, child support and property settlements carry no tax consequences.

Still, the widespread tax implications of divorce can be complicated. Issues range from what's the proper filing status to who gets to claim the children as a dependent.

Whether a divorce decree is signed July 15 or Dec. 31, taxpayers are considered divorced for that tax year, said David Stell, Oklahoma spokesman for the IRS.

If a divorce is pending, most experts recommend couples file joint returns if possible. That's because married taxpayers who file separately usually owe more tax, Stell said.

Separated spouses should be aware they can file as head of household, if they paid more than half the cost of keeping up a home for the entire year, their spouses didn't live in the house the last six months of the year and they have dependent children.

The election recently helped one of his clients go from owing taxes to having a refund, said Pete Terranova, Oklahoma City certified public accountant.

A head of household's standard deduction alone is $2,300 greater than for "married filing separately," he said. In addition, there are $4,400 in potential earned income tax credits, which aren't available to taxpayers who are married filing separately. The credit can erase taxes owed or give a refund.

In acrimonious marital situations, the IRS regularly sees parents attempt to claim the $3,200 exemption, $1,000 child tax credit and deductions for child care expenses for the same children, Stell said. Generally, the custodial parent, or parent with whom the child lives, receives the tax incentives, he said.

Divorce decrees can grant exemptions to noncustodial parents. But custodial parents must sign declarations that they won't claim the exemption, Stell said. The declaration -- IRS form 8332 -- must be attached to the return.

Ideally, the form -- which can be signed for a yearly or indefinite basis -- is completed when a divorce is finalized, Klingenberg said.

In joint custody cases, the question of which parent can claim the exemption comes to down to who has the child in their home the most number of days, he said. If time shares is the same, the parent with the higher adjusted gross income (AGI) can claim the incentives.

"There are a lot of issues that nonworking spouses should be on the lookout for," said Trish Goodman, an Edmond certified financial planner and one of a handful of certified divorce financial analysts in the state.

For example, there may be an advantage in receiving a share of an ex-spouse's retirement and/or pension assets versus accepting the equity in a home, Goodman said. Or a greater property settlement may be more advantageous than taxable alimony payments.

What at first seems fair, may not be, Goodman said. For example, homes, she said, come with tax implications -- from annual real estate taxes to capital gains taxes owed, if and when they're sold.

"My role is to quantify what each settlement option will look like and make 'what if' adjustments to help divorce attorneys reach an equitable division for their respective clients," Goodman said. "If I do my job right, the case should never have the expense of going to court over financial issues."

In general, women worry too much about keeping their "nests" for their children and not enough about their retirement, said Rebecca Hadler, a registered financial consultant with Access Financial Resources.

"They learn to manage through the alimony time frame," Hadler said, "but many are dangerously close to bankruptcy between the end of alimony and the time they can access retirement income."

IRS Makes It Tougher For Spouses to Claim Innocence in Tax Fraud

It is getting harder to prove your innocence when you sign a joint tax return with your spouse that later turns out to be wrong or fraudulent -- due to a combination of tougher IRS enforcement, a string of recent court cases and ambiguous laws.

Most married couples file jointly, a strategy that typically saves taxes. But as thousands of taxpayers have discovered in recent years, signing a joint return can turn into a long-running nightmare when a spouse has neglected to report taxable income or committed some other offense.

In an "innocent spouse" defense, one spouse argues that he or she didn't know, and didn't have any reason to know, about any wrongdoing -- and shouldn't be responsible for paying the taxes due.

Lea Fastow, the wife of former Enron Corp. Chief Financial Officer Andrew Fastow, declined to mount that defense -- though her husband later implied she could have. She pleaded guilty in 2004 to filing a false joint tax return and subsequently spent a year in federal prison. In emotional courtroom testimony last week, Mr. Fastow choked up and wiped tears from his eyes, saying he had misled his wife about the source of some of the couple's money from an Enron-related deal.

"I find it hard to believe myself that she is guilty. I did mislead her," Mr. Fastow said.

Congress changed the innocent-spouse law in 1998 after protests from many victims, mainly women, who felt they were getting stuck with tax bills they didn't rightfully owe. The changes broadened the circumstances under which one can qualify for relief. Critics now say these protections, in the face of stepped-up IRS enforcement, are too weak to do the job Congress intended.

When you file jointly, both you and your spouse are responsible for any taxes, interest or penalties on those returns, with relatively few exceptions -- even if you later get divorced. That means the IRS typically can collect all the tax owed from either person.

That is true even if you signed a divorce decree saying the other spouse will be responsible for any taxes due on previously filed joint returns, the IRS says -- and even if all of the income was earned by the other person.

That is why tax advisers routinely advise clients never, ever to sign a joint return if the client suspects his or her spouse didn't play by the rules. While you may honestly believe you are innocent, proving it requires jumping over several hurdles.

To qualify for innocent-spouse relief, you have to demonstrate, among other things, that you didn't know -- and had no reason to know -- there was an understatement of tax. Proving you had no reason to know can be especially tough, especially if you are well educated. There are two other possible escape hatches, but they can also be difficult to get through, lawyers say.

The relief rules are "sometimes overly narrow, complex, costly for the IRS to administer and burdensome for taxpayers," the Taxpayer Advocate's report says.

Furthermore, even if someone is declared an innocent spouse and not liable for the other spouse's tax, the IRS still may be able to collect the other spouse's tax liability from the "innocent" person in community-property states such as California, the report says.

A Tax Court case decided last month shows it isn't enough simply to argue that your spouse prepared the taxes and didn't tell you how it was done, and that you didn't even review the return. The Tax Court rejected a Utah woman's request for relief, saying she knew, or should have known, about such issues as unreported income from her husband's business.

In another case decided in February, the court ruled against a North Carolina woman who said the tax debt was due to her ex-husband not paying his Social Security taxes. She said she had been told by her accountant to sign a joint return, even though she was separated, in order to "help with divorce relations" by lowering the amount he owed.

Needless to say, that was a bad idea. "I would advise anyone very strongly not to sign a joint return if they have a whiff of any impropriety," says Elizabeth Cockrell, a Colorado woman whose case helped lead to the 1998 tax-law change. "I'll never, never sign a joint return again," she says, "even if I were married to the commissioner of the IRS."

From the Wall Street Journal (subscription required)

Tax filing status for divorcing couples

One of the most common questions this time of year is how a client should file their tax returns--should they file married filing jointly, head of household, individual, or married filing separately. The correct choice for your situation can save you money and potential liability for improperly filed taxes.

Divorced/Separated Couples

A person who is divorced or legally separated before December 31 of the tax year, cannot file a joint return. They must file either an individual return or as head of household. If your marriage has not yet been dissolved or you are not legally separated, you may file as married filing jointly or married filing separately.

Married Filing Jointly

Married filing jointly status will produce the lowest tax rates and the highest standard deduction. The spouse paying support will benefit from this status because their overall tax liability will be lower. That will allow for more available net income for the paying spouse and more support for the supported spouse. As a result, until your divorce is final, it may benefit the spouses to file married filing jointly.

On the other hand, a joint return will usually expose both spouses to joint and several liability for any tax due on the return. The lower earning spouse may ask for an indemnification from their spouse. While such an indemnification may be binding between the husband and wife, it is not binding on the IRS.

Married Filing Separately

Married filing separately has many downsides including the loss or limitation of many credits and deductions such as the Child and Dependent Care Credit. And the higher paying spouse will be required to pay tax at a higher rate which results in lower available net income to pay support.

The main advantage of filing a separate return is to avoid joint and several liability for an improper return filed by your soon to be ex-spouse and to enable a deduction for spousal support (alimony) while you are still married.

Head of Household

To file as a head of household, you must be unmarried on December 31 of the tax year, maintain a home where a child lives for more than half of the year, and pay over half of the expenses of maintaining the home. If you are eligible, persons filing head of household will get a lower tax rate than that of single taxpayers, but higher than that for married persons filing jointly.

Abandoned Spouse Rule

Even if you are still married, you can nevertheless file as a single person if you meet the following  requirements:

1. You file a separate return;

2. You maintain a home where a child for whom you may claim a dependency deduction lives for more than half the year;

3. You must provide more than half of the cost of maintaining the home during the year; and

4. During the last 6 months of the year, your spouse must not live in the same house as you.

For maximum tax savings, the abandoned spouse status will often be most favorable.