Debt Before Marriage

[GTS1101]

I have a client who lives in a community property state (California). She recently got married and her husband owes a large sum to the IRS and other goverment agencies. My client also has some past due debts with the state. I told them that they would have to file MFJ and then both could claim the injured spouse so that each other is not liable for the others debt before marriage. They wanted to file separately but I explained CA is community prop therefore if we did a separate return it would just be cutting in half and putting half on each others return. Do you have any other recommendations other than injured spouse? Am I correct in stating that in a community prop state any debt before the marriage remains that persons debt and the new partner does not take on that debt?

GTS1101

[Bill Tubbs]

Injured spouse...

If filing separate returns does indeed end up with the same net tax effect, that may not be a bad option (depending on their situation there may not be credits available for MFS that they would get for MFJ). That way only her refund is intercepted for her debts, and same for him (regardless of community property state rules). But, in order to correctly file an income tax return for a community property state, you should split their income accordingly -- each person's pre-marital income is 100% the wage-earners; but after marriage they each claim 50% of the community income -- generally.

I don't know what the IRS would do with 2 Injured Spouse allocations on the same MFJ return. If I did a MFJ for this, I would probably just add 1 Injured Spouse for the spouse that has less back debts being intercepted.

Bill

[George Boutwell]

For California, your analysis is probably correct. For other community property states, it may not be. IRS discussed several state laws (California, Idaho, Louisiana) in a 2004 Revenue Ruling.

"California law provides that a creditor may reach all of the community property to satisfy a debt incurred by a spouse before or during marriage. See Cal. Fam. Code section 910(a) (2003). A creditor may also reach all of the liable spouse’s separate property to satisfy a debt incurred by the liable spouse; however, a creditor may not reach any of the non-liable spouse’s separate property. See Cal. Fam. Code section 913 (2003)."

http://www.irs.gov/irb/2004-30_IRB/ar11.html

It is not unusual that your clients would be concerned enough about this issue now to waste your time and efforts in helping them avoid paying debts, but were so hot to trot before the marriage that they didn't do a prenuptial agreeing to disregard community-property laws in determining who owns their respective incomes.

[peggysioux]

2004-72 ruling

After reading the ruling, it appears that in the state of California, that even if one spouse has debt that was incurred prior to the marriage; the IRS can apply the overpayment of the non-liable spouse's to the liability. If I am interpreting correctly, what would be the purpose of filing an injured spouse claim if taxpayers reside in CA?

[peggysioux]

Injured Spouse

If taxpayer lives in CA, which is a community property state and married in 2006 to a taxpayer who has not filed for about six years so obviously has tax liabilities, taxpayer would like to file as injured spouse. But in reading the Rev. Rul. 2004-72, it sounds like the IRS would attach her portion of refund as well if her refund was due to wages earned in 2006. Is there any purpose in a community property state to file as injured spouse???