Separated Couple

[rfk]

Does anything in particular have to be considered about couple separated, 2003 & 2004 situation, husband made all of money in 2003. Wife made very little in 2004, husband still made more. They were not living together in those years but feels that husband should be able to take most of deductions etc. However community property thwarts this idea.

Wife took all 2002 refund while he was going through a very tough time with the pending separation and forthcoming divorce situation. He wants to file MFJ, but I said that since she is not a willing participant during that time and they were not not together, especially with the tax bill, it won't happen. She has to sign off on it too. They live in California.

Consequently, he will be stuck with the large tax bill from 2004, but he wants her to file MFJ so he can take advantage of that status instead of MFS for lowering tax. But no one wants to be part of a tax bill.

Do someone have an opinion about what the best thought would be? I guess I am looking for some ideas on how to tell my client that he still has to file MFS, since they were not together, and it would be up to her to select that idea, but not with an impending tax bill.

rfk

[Koss]

Who is your client?

It sounds like your client is the husband.

This is one of those situations where you may not be able to do both returns, unless they agree in writing to waive any conflict of interest. You probably can't even advise both clients. If you have an existing business relationship with one of them, you may not even be able to talk to the other one.

If your client is the husband, I'm not sure there's any way to explain it other than the simple fact that MFJ requires agreement of both spouses, and she doesn't have to agree.

Assuming for the moment that the husband is your client and that the wife is not, and that you are discussing the matter with him when she is not present...

You can advise him based on his estimate or best guess as to what his wife's income was during the years in question. And then you can tell him, with a straight face, something like this:

"Well, it would be better for you to file a joint return. But you can't do that unless she agrees to it. And based on what you're telling me about her income, she's probably not going to agree to it. Any tax advisor that she talks to is going to tell her not to file a joint return, because it's not in her best interest. It doesn't benefit her, and it makes her liable for your tax bill."

BMK

[Gary2]

The obvious answer is that his lawyer should have balanced things out as part of the divorce. Presumably he had a legal right to half the 2002 refund that should have been taken into account.

If there are still lawyers involved, and if amending 2003 and 2004 produces a net savings, then perhaps the husband could agree to put up the reduced balance due (plus interest and penalties) into escrow with her attorney, to be used to pay the returns when she agrees to sign them, along with paying her attorney and perhaps a some of the net savings to her for her trouble. That way it wouldn't cost her anything financial, and he'd still come out ahead. This would depend on the MFJ savings being enough to cover the additional legal costs.

Getting back to the purely tax issues, first was there any spousal support agreement in effect for those years? If so, then one question is whether they'd be considered legally separated under CA law, and hence could be filing as single. This, too, would need a consultation with a lawyer, as the IRS has been known to challenge such cases based on both whether the requirements of state law for legal separation have been satisfied and whether the state's meaning of "legal separation" satisfies the federal intent.

Finally, see the special rules for spouses separated the entire year in Pub 555. It's vague on how deductions get allocated, but I think that if he meets the criteria for treating the income as separate, then the deductible expenses paid from his separate income might also be his alone. Hopefully someone with more experience in CA community property laws and taxes can comment on this.

[rfk]

Thanks for the input

I will be at least talking to him about the lawyer and settlement situation and the taking of all the 2002 refund by ex-wife. It seems that he is left holding the bag with the income stream, and the taxes due for 2003 & 2004. Although his income stream, she should be part of it. Does not seem fair to me. She was married to him.

rfk