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Tax issues must be addressed in a separation agreement, and clients should be advised to consult an accountant and/or a tax attorney with regards to tax issues. Tax law changes regularly and can be complex, particularly in high asset cases.
Both signatories on a joint tax return are responsible for liabilities, including penalties and interest. Consequently, any payment responsibility for a liability should be specifically designated. Additionally, if a refund is owed, division should also be specified. For example, one option is that the parties equally divide any refund or liability. Another option is to allocate any liability or refund to the spouse whose income, credit, or deduction during the marriage produced the tax benefit or consequence. Additionally, jurisdiction may be reserved to determine the issue of refunds or liabilities if not known at the time of allocation. An agreement should set forth how the upcoming tax return will be filed – i.e., whether the parties will file individually or jointly for the next tax year. The parties must be married at the end of a tax year to file jointly.
Parties should address income tax returns for the preceding tax year, if that return has not yet been filed, and the current year. If returns have not been filed for the immediately preceding year, the parties should specify filing status and allocation of liabilities or refunds for that year. The same should be specified for the next tax year as the parties may or may not be able to file jointly depending on if they were married at the end of the tax year.
Tax Liability AllocationCourts may apportion tax liabilities arising from joint tax returns between the parties in proportion to their respective earned incomes for the relevant tax year. This approach is consistent with the principle of equitable division. It should be noted that the Internal Revenue Service may hold the parties jointly and severally liable for such liabilities. In re Lafaye, 89 P.3d 455 (Colo. App. 2003). This sometimes results in the need for a cash payment form one party to the other to compensate for the difference in federal law and the court order as the federal government is not bound by a state court order.
Taxation of Divided PropertyAnother type of income tax issue arises in the division of property as property may be pre or post taxed. For examples, Roth IRAs are pre-taxed, while traditional IRAs are post-taxed. Thus the tax consequence of the division of such assets is relevant and should be considered in division.
Turning Change Into Opportunity in Colorado Springs, Colorado Divorce and Child Custody
A highly knowledgeable and experienced Colorado Springs divorce and child custody lawyer can guide you through Colorado Springs divorce and child custody matters by negotiating, mediating and litigating on your behalf. You can focus on moving to a better future instead of spending your time attempting to navigate complex legal rules and procedures.
Sabra Janko from Janko Family Law has more than 20 years of legal experience and has written “the book” on Colorado divorce and family law – “Colorado Family Law With Forms”, published by LexisNexis, which you can find at https://store.lexisnexis.com/products/colorado-family-law-with-forms-skuSKU02903. Contact us at 719-344-5523 or complete our online scheduling request for a free 30-minute informational consultation. We also offer paid advice sessions for a more in-depth analysis of your case.