Issues 1 through 4 all focus on the tax liabilities created post-divorce. But what about tax liability incurred during the marriage?

Issue #5. JOINT TAX LIABILITY: The Court has the power in a divorce case to assign both assets and liabilities, including tax liability incurred during the marriage. If there are joint tax returns filed during the marriage for which taxes are still owed, that liability is owed by both parties to the taxing authorities. The Court may assign that debt to one party by order or agreement, but that doesn't always satisfy the taxing authorities.

Unless you file an innocent spouse application with the IRS (and the IRS makes an innocent spouse determination in your favor), they will still consider a joint debt owed by both parties until satisfied. A probate court order allows you to collect against your former spouse but does not prevent the IRS from collecting against you. Therefore, if there are any assets available for the payment of tax debt at the time of divorce, paying the debt off immediately is recommended.

We also recommend including language in any settlement agreement to deal with the possibility of an audit that assigns debt on a joint return that was previously considered satisfied:

"For the years of the marriage (__________ to __________), if there is a deficiency assessed in connection with any joint federal or state income tax returns heretofore or hereafter filed, or if any other notice is received by either Party relating to any Federal or State tax, interest or penalty claim, the Party notified thereof shall forthwith notify the other Party immediately in writing. Each Party, on account of whose net income a deficiency is assessed, shall pay the amount ultimately determined to be due thereon with respect to his or her net income, together with interest and penalties, and shall pay as well any and all expenses that may be incurred if he or she shall decide to contest the assessment.

In the event that the deficiency is assessed with respect to joint income, each shall pay the deficiencies and expenses in the same proportion as each Party actually received the said gross income for the calendar year in which the deficiencies and expenses are assessed. For purposes of this EXHIBIT “gross income” shall be defined in accordance with the applicable provisions of the Internal Revenue Code of 1986 and in accordance with the applicable provisions of the Massachusetts Child Support Guidelines.

Each Party shall keep the other fully informed of any and all steps taken by him or her with respect to any deficiency assessment. The Party whose actions are responsible for the deficiency, if any, shall in all respects indemnify the other against and hold him or her harmless from any deficiency assessment or tax lien arising out of any joint return heretofore or hereafter filed by the Parties, as well as any damages and expenses whatsoever made in connection therewith including reasonable attorney's fees and costs."

Click here to read Divorce and Taxes: Issue #6. Same Sex Marriages.

There are two certainties in life: Death and Taxes. We've already written about how divorce and estate planning are interrelated, but what about divorce and taxes?

In all cases a divorce will affect some part of your tax return. In most cases there will be numerous changes in your income tax liability after your divorce and you should give consideration to what changes will take place because this could be a factor in determining the best divorce settlement for you. In some cases these changes may be complicated enough that your attorney should involve an accountant or certified financial planner to help analyze the different options. Our next five blog posts will explore the various issues raised by the interrelation of divorce and taxes so that you are at least aware of the issues to be on the lookout for.

Issue #1. MARITAL STATUS: The most obvious way that a divorce will affect your taxes is by changing your marital status. This is a change to your federal income tax return that will happen after every divorce case.

In Massachusetts, after the expiration of the Divorce Nisi waiting period (90 days from the issuance of the Judgment of Divorce Nisi) when the Judgment of Divorce becomes final you are officially divorced and you are no longer qualified to file a tax return as "married, filing jointly" or "married, filing separately". The key date for determining your tax year marital status is December 31. If your divorce nisi period crosses December 31, then you are technically still married in that tax year and must still file under a married status.

Obviously, marital status has a significant affect on your income tax liability and if you are scheduling an uncontested divorce hearing in the Fall you might want to consider whether it makes sense to schedule it early enough to change your status by December 31, or wait.

Click here to read Divorce & Taxes - Issue #2. Child Support v. Alimony.

For the purposes of Federal and Massachusetts income tax returns you are required to file under the status of either "joint" or "married, filing separately" if you are married to your spouse on December 31st of the tax year in question. Therefore, if you are in the process of getting a divorce but were still legally married on December 31, 2010, then you must file under one of these two statuses for the year 2010.

There is no specific law that requires you to file under the status of "joint" or "married filing separately", and typically this is your choice. A Judge can order parties to file jointly if there will be a benefit (such as a higher refund), but this is not typical.

In each case the choice of how to file can be affected by different factors. For example, if you are concerned that your spouse is hiding income, then you definitely would not want to file a "joint" tax return because you could be liable for his/her hidden income.

In most cases it makes sense to file jointly because their is usually a financial benefit, but in your case you should consult with an accountant to figure out the best option for you.