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Can Divorcing Spouses Allocate Estimated Tax Payments?

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Can Divorcing Spouses Allocate Estimated Tax Payments?

How Are Tax Liabilities Handled in a Divorce Settlement?

When a divorcing couple has historically filed joint returns but intends to file married filing separate returns for the first time due to a pending divorce, any estimated tax payments made for the year are ordinarily credited by the taxing authorities to the first person listed on the previous year’s joint tax return.  This person is viewed as the “taxpayer,” and is ordinarily the husband. Issues can arise when the wife is listed second and earns a majority of the couple’s income.

For example consider that even if the parties agree in advance to some alternate allocation (other than 100% to the “taxpayer” spouse), there is ordinarily no reliable way to inform the taxing authorities of any agreed upon allocation of the estimated tax payments between the spouses other than assigning 100% of the obligation to the “taxpayer” spouse. This situation is further exacerbated where “taxpayer” spouse file his or her tax return early in the tax season and gets a refund credited for 100% of the estimated taxes before the “non-taxpayer” spouse files his or her tax return.

IRS Publication 305 Permits for the Division and Allocation of Estimated Tax Payments

IRS publication 505 concerns Withholding and Estimated Tax. This publication indicates that couples can divide estimated tax payments, including applied refunds of prior year overpayments, in any way in which they so agree.  However, despite this authorization, the IRS will often ignore these calculations and simply allocate the entire overpayment to the “taxpayer” spouse without allocating any of the overpayment to the non “taxpayer” spouse.

However, in seeming contradiction to the IRS’s actions, IRC Sec. 6402(a) dictates that overpayments should be credited against the tax liability of the taxpayer that gave rise to the overpayment. If both spouses contributed to the overpayment on a prior jointly filed return, the overpayment theoretically needs to be apportioned to each spouse’s current tax liability in proportion to each’s contribution to the prior year’s overpayment.

Solutions to IRS Estimated Tax Payment Allocation Issues

A potential solution to IRS ignoring agreed upon allocations problem could be to treat the current year estimated taxes including any prior year overpayment as a marital asset specifically allocated to the “taxpayer” spouse with the non “taxpayer” spouse receiving a like amount of some other form of martial asset in the property settlement. This approach could prove more manageable than providing an allocation of estimates and overpayments between the spouses to the IRS, which they often seem to overlook.

In any case, it is often essential to work with a tax lawyer or tax professional who understand the difficulties the IRS has with this issue and can identify when the IRS has ignored the couple’s agreed-upon allocation of taxes. A tax lawyer can address problems of this type and work to ensure that the taxpayer’s agreement is respected and adhered to by the IRS. Proceeding in this fashion increases the likelihood that a party will receive exactly what he or she has bargained for as part of his or her divorce settlement.