In any divorce, issues of the treatment of taxes will arise. In most cases, one spouse will have assumed the responsibility for preparation of household financial documents and continues on with the chore out of habit, but sadly, with the shattering of the trust that comes about from the end of a marriage, there also comes a reluctance to cooperate.
There are some good general principles to adhere to with regard to questions about taxation in a divorce, and there are certain predictionsthat a good attorney can make regarding the likely rulings of judges in Louisville as they apply Kentucky law.
- Tax returns for the year in which the divorce decree is issued should almost always be filed jointly, assuming that neither party has underlying problems regarding unpaid taxes or unreported income. With the proliferation of good tax software, it is now fairly simple to prepare one set of returns to file jointly and one set of returns individually to determine the most advantageous method of filing.
- If there is a dispute as to the disposition of tax refunds, they can be held in attorney escrow or paid into a court receiver's office pending allocation by the court.
- Although the court can allocate unsatisfied prior year tax obligations between the parties, the IRS is empowered to enforce those jointly or separately against either party, absent approval of an application for treatment as an innocent spouse per IRS regulations - something which is very limited. The general remedy a wronged spouse has with regard to tax collections counter to court order is to seek sanctions against the defaulting spouse in the family court, and the court can order a restoration of funds to the wronged party (which are domestic support obligations and are nondischargeable in bankruptcy). The family court can and does use its contempt power on these restorations, and that contempt power can include jail time.
- The general IRS rule provides that in the absence of a directive of the trial court, dependent deductions and exemptions go to the parent who has the child or children over 50% of the time. Kentucky courts, however, usually either divide these deductions or exemptions among alternate tax years, thus meeting the exception to the general Federal rule. Another method less frequently used involves each party to calculate taxes with a goal to maximizing the tax benefits afforded by the children, and to equalize the benefit with a separate payment to the other spouse.
When divorcing, it is important that your attorney be at least conversant on these tax issues (I do preparation of returns, and am admitted to tax court) in order to fully meet your needs, and if you don't understand what you're being told, ask appropriate questions.