Q. My husband and I separated in 2009 but we are not divorced yet. We are on extension because he wanted me to sign a joint tax return with him, but I am nervous about doing it and keep stalling. He says if I don't sign he will ask the judge to make me. He has his own business and I suspect he is not reporting all his income. Am I required to file jointly and what happens if I do?

A. If you remain married as of December 31 of any year, you may - but you not required to - file jointly with your husband. It does not matter that you were separated during the tax year as long as your marital status has not been terminated, for instance by a Bifurcation application. You cannot be forced to file jointly, and no judge would order that you do so. Married people who are considering not filing jointly, however, should avoid signing the joint Form 4868 for the automatic extensions; depending upon other circumstances, the IRS might deem this is a consent to a joint return.

The chief problem with filing joint tax returns is that each spouse is "jointly and severally" liable for one hundred percent of any taxes due on either and both parties' income, and interest and penalties as well. If you suspect your husband is defrauding the IRS you are ill advised to file with him. Another problem is that absent an agreement otherwise, tax liabilities incurred between the date of marriage and the date of separation are community property debts, regardless which of you generated the income upon which the taxes are based. If it is not clear that you do not intend to take on any share of the liability, particularly the portion incurred after separation, by signing jointly an argument can be made you should be responsible for one-half of the full-amount. It is best to define your understanding in a writing signed and dated by both of you.

If you do file jointly anyway, at a minimum consider first getting him to sign an indemnification agreement; if there is a court proceeding pending between you, this should be in the form of a Stipulation and Order that is filed with the Court. You want a judge's signature on the agreement because agreements have to be converted into orders or judgments anyway to be later enforced if one party breaches their promises.

Indemnification agreements are only as good as the availability of a meaningful remedy, and they apply only as between the parties and do not bind the IRS or anyone else. Even if your husband promises to pay all the taxes, interest, and penalties, and even if his promise becomes a court order, as a practical matter if he later lacks the ability to meet his obligation (or refuses to do so) you may wind up with a money judgment against him that you cannot collect.

But there can be good reasons to file jointly, and it is much less a problem where your spouse is trustworthy. Taxes are usually but not always lower, and to the extent he paid you spousal support in 2009 if you file jointly you will not be charged with that as taxable income; but nor will he get to claim the spousal deduction.

The issue of joint returns is something divorcing couples often barter over. You ought to have clear ideas of the pros and cons for you in your particular situation. If you are reluctant to sign, consider what you might trade for. It may be helpful to know how much money your spouse stands to save if you agree to file jointly, so you can evaluate the value to him of your cooperation.

I urge you to speak to a competent accountant or other tax specialist early on, and before signing an extension request. Most attorneys have a limited understanding of tax rules, and they will usually urge you to consult an expert. You should follow that advice. Unless a lawyer is herself a tax specialist, avoid relying just on an attorney's opinion. Besides, an accountant can examine how you might end up under your other options.

More more blog articles and tax issues in California divorce, visit us here!

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Thurman W. Arnold III

Q. I remarried in August, 2009, and my new wife is a doctor. She has one child from her prior marriage and I have two. I am still paying my former wife alimony and child support. We largely depend upon my wife's medical income to make ends meet. Now my ex is threatening to take me back to court to increase my support based upon my new wife's income, while my own income is down from when the court last decided it. My new wife is upset at the idea that my ex can learn anything about the medical practice or income. What are our rights?

Peter, Sacramento, CA

If there has been a material decrease in your income since the time of your last order, you may safely file a support modification motion to lower your child support and to lower or possibly terminate your spousal support. Whether that is advisable based upon your numbers has nothing to do with your new mate's income, and should not cause you to hesitate - but again, it does depend on the actual respective numbers between you and Wife 1, which you did not provide me. You also need not worry about W1 filing a motion to increase (you can't stop her, but she will not win based on W2's earnings). Maybe you should give her this link so she will think twice.

New-Mate Income Generally Cannot Be Considered In Setting Child or Spousal Support

California law is quite clear that new mate income cannot generally be considered against you in ordering or modifying child or spousal support. The controlling California Family statute is section 4057.5.

In the normal situation, Family Code section 4057.5 leaves the Court no discretion to consider your new wife's earnings, period. You do not need to report those earnings on your FL-150 (Income and Expense Declaration). This is a statement of California legislative policy effective in 1993 when this section was added to the Family Code. This is true for both spousal and child support.

However, section 4057.5 does contain an exception for the "extraordinary case" which the statute makes clear is intended to address situations where "where excluding that income would lead to extreme and severe hardship to any child subject to the child support award" or where "a parent ... voluntarily or intentionally quits work or reduces income, or who intentionally remains unemployed or underemployed and relies on a subsequent spouse's income." Even if the court were to find a severe hardship on the children of marriage number one, it would be required not to impose a severe hardship on your wife's child by reallocating her income to you for purposes of supporting your two children.

In practice, so far, Courts almost never find facts sufficient overcome this clear statutory prohibition. So far there is no published California appellate decision defining these extraordinary circumstances. No doubt one day someone will so abuse this protection and hide behind it that we will get a reported decision that fleshs out how bad someone needs to behave before the protection is lost. But "extraordinary" means really extraordinary. In the average case, your new Wife has nothing to be concerned about.

With regard to attorneys fee awards, however, there is authority for an argument that new mate income may be considered in granting or denying an attorney fee request, but the odds are against a judge doing that.

Incidentally, this section also applies to income from nonmarital partners as well as new spouses. In one reported case (IRMO Loh), a trial court was reversed for inceasing dad's child support obligation after the mother produced photos of the father's "lifetyle" to show imputed nontaxable income in the form of his new girlfriend's contributions to him, since she paid for all his toys.

The new mate question is a subset of the "imputed income" situations where a father or mother may quit work or reduce hours because they are relying on their new mate to contribute the difference. That is not likely going to be an extraordinary case, but W1 can separately seek to impute income to you on the basis that you have a higher earning capacity than you are exercising. Earning capacity and imputed income is a blog for another day. Also, I will mention here that another argument exists in favor of W1 that has nothing to do with the right to obtain the records or income of W2: Equalizing the lifestyle's of the two households where yours is rich and grandiose and W1 is impoverished (an extreme example) pursuant to FC section 4057(b)(4).

What About Tax Returns?

The tax returns are privileged as they relate to your new wife's medical practice. For instance, if she is a medical corporation (which I recommend be set up), she will almost never be forced to divulge those records. Even as to your joint returns, you may be entitled to redact the information concerning your new spouse or have the Court review them in camera (meaning they are not turned over to the other side). Your former mate is entitled to see your side of the tax returns, however, and they are not insulated from scrutiny simply because you filed joint with the Doctor Wife. If you don't file jointly, your former wife will almost certainly never get her hands on your new wife's Married Filing Separately (MFS) returns. Structuring things this way may or may not be advisable and you should consult a tax accountant.

An interesting twist here is that because you marry a higher, wealthy earner, your taxes actually increase because under federal IRS (and the California FTB), you are responsible for one-half of your new mate's income - and this is true even if you don't file jointly. One case (County of Tulare vs. Campbell) has held that this additional tax you become liable for can form the basis for a reduction in your support because you have less net income available for support after the tax hit is deducted. Hence, based on these tax consequences you may have an additional argument for decreased support - although a Court may try to deny you some discretionary offset to even the score since this feels a bit unfair to the spouse who is primarily supporting the children and so lessen the downward modification.

For more articles about the ins and outs of new mate income, visit us here!

The take-away: So long as you are not playing games, have not intentionally reduced your income by relying upon your new mate's income, and there is no really extraordinary difference in the two households, your new wife's income is just not relevant and so it is protected.

Be safe out there!

Thurman Arnold

Please Note: There have been some important changes to IRS policies for how to claim the dependency exemption since this Blog was first written over two years ago - please click here for the latest information.

TWA - March, 2012

The Tax Court rules that a noncustodial father is not entitled to claim the dependency exemption because the custodial-parent (mother) failed to complete Form 8332, releasing the exemption and dissolution judgment, which father attached to return, was not a sufficient alternative because it did not contain substantially same information as the form 8332 does.

This is a really common situation, where a parent wrongfully claims a child or children on their tax return despite the fact the other parent is entitled to it that year according to the terms of a Judgment or Order. It holds that despite the language of a Judgment, without Form 8332 signed and attached to the return, the IRS will not recognize the dependency deduction.

You still have your claims against the other parent for the financial damage this costs you in terms of the increase taxes, however, but now you have avoidable attorney fees or must waste your own valuable time enforcing your rights in taking her back to court.

Click here to download IRS Form 8332

Thomas v. Commissioner (1/19/10) TCM 2010-11, No. 17922-08 (Vasquez) 2010 WL 174107 illustrates the perils of not handling how you will get your spouse to cooperate long before April 15th.

When Arizona resident (F) was divorced from M in 6/94, their disso judgment awarded custody of their 3-year-old daughter (C) to M; F was awarded 30 days of visitation in summer, plus reasonable visitation in C's state of residence. F was also ordered to pay child support of $400/mo through AZ T/CT.

Disso judgment further provided that M would claim dependency exemption and child tax credit for tax year 1995 and succeeding odd-numbered years, while F would claim exemption and credit in even-numbered years if he was current in his child-support payments. M was required to execute necessary forms to permit F to claim exemption and credit, but only if F's child-support payments were not in arrears.

In 2006, F was not delinquent in his child-support payments for C, who lived with M in Ohio. On his 2006 federal income tax return, prepared by CPA, F claimed dependency exemption and child care credit, but CPA subsequently notified him that his return was rejected from electronic filing because someone else claimed dependency exemption. CPA then filed F's paper return, to which F attached copy of disso judgment, but not IRS Form 8332 exemption release. IRS sent deficiency notice to F, claiming that he was not entitled to claim either dependency exemption or child tax credit. F then petitioned U.S. Tax Court for relief, but TAX COURT RULES FOR IRS.

Tax Ct finds that (1) per IRC §152(e), F, as non-custodial parent, was not entitled to claim dependency exemption unless

(a) C received more than half of her support from M and F,

(b) M and F were divorced, separated, or living separate and apart for last 6 mos. of 2006,

(c) C was in custody of either M or F more than half of 2006, and

(d) M, as custodial parent, released dependency exemption and F attached Form 8332 release or a document conforming to its substance to his return; (2) F could meet conditions (a), (b), and (c), but not (d); (3) disso judgment did not qualify as conforming document because it lacked Social Security numbers for M and F, M's signature was not dated, and release of exemption was conditioned on F's being current with child-support payments; (4) F could not claim dependency exemption; and (5) F's being unable to claim dependency exemption meant that he was also ineligible to claim child tax credit. Tax Ct concludes that although it is sympathetic to F's predicament, it is bound by statutes and regs as written.

For more articles discussing the mechanics of 8332 Dependency Deductions, click here.

Author: Thurman W. Arnold, III, C.F.L.S.