Not many people think about their tax withholdings from their paycheck or the tax estimates paid towards their current year’s tax liability as something they need to address during their divorce process. Yet, if you don’t you could be leaving money on the table.
Your tax estimates and tax extension payments, together, are truly an asset of your marital estate. They remain an asset on the marital estate until you file your tax return. At that point in time any estimates or withholdings are applied against the outstanding tax liability.
Given the fact that your settlement date will likely not fall on tax day, you usually have monies “on account” with the government. For purposes of your divorce these monies are considered a marital asset that need to be addressed during your divorce. Why? Take a look at these questions.
- Which spouse should receive “credit” for the payments made to the government?
- Should the payments be split equally, assigned to one spouse or based on a ratio of taxable income?
- What happens if the tax estimates were designed based on next year’s liability to cover the first quarter and you anticipate more income in Q1 of next year? How do you address this issue in your marital estate? In this context, how should the estimates be applied to each spouse?
- Do you want to use the monies that are “on account” with the government as a mechanism to negotiate other assets in your marital estate?
- If you submitted a tax filing status as married filing jointly (MFJ) and later in life your joint return is audited could the government come after you as an individual for the tax exposure? In short the answer may be Yes.
For your information, the IRS views your tax estimates and extension payments as payments made towards the obligations of the marital estate (not an individual). In fact as long as you are submitting your tax returns with a filing status as MFJ both spouses in the marriage are equally responsible for the tax liability from the government. We are not suggesting you utilize a tax filing status of married filing separately (MFS) as the tax bracket is higher than MFJ. In most situations it does not make sense to file MFS unless you have concerns your spouse did not put forth the truth and you could be subject to a tax liability from a potential IRS audit.
In terms of your marital estate, your tax estimates and tax extension payments that have not yet been offset against your current year tax liability are considered a deferred tax asset. In other words, it’s a tax benefit you may be eligible to receive at a future point in time. As a result, it is a negotiable item in your marital estate which needs to be addressed. If you do not incorporate this deferred tax asset in your negotiations you will discover the government may apply any and all estimates and extensions towards the first name listed on the tax return.
There are ways to protect yourself from accidentally (or intentionally) being placed in a compromised tax position from your divorce.
About the Author
Larry Smith CPA, MBA
Larry is a Founding Partner of Divorce Outcomes, a specialty professional services firm that analyzes, architects and negotiates all of the financial aspects of a divorce.
Since 2003, Larry has worked with divorcing parties as their fiduciary to design sophisticated divorcing strategies that enable clients to preserve and create wealth from their divorce. As a technical financial expert, he uncovers hidden tradable components through various analytical and architectural processes to arrive at desired outcomes. He is an alumni of KPMG and Andersen and has expertise in:
- technical accounting, taxation, business consulting, risk management, M&A
- forensic analysis, performance analytics
- M&A, business valuations, divorce management, family equity transfers, multi-party negotiations, communications management
- advanced process engineering, cognitive performance technologies
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in a divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients:
- manage their divorce process
- uncover hidden financial risks
- architect divorce solutions
- manage ever-changing negotiating positions
- communicate complex financial matters
- close the divorce process as soon as possible
Throughout the process we evaluate our clients’ current wealth-at-risk and architect desired outcomes to best preserve or create wealth.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.