Tax Debts and Community Property States

California and Nevada are community property states. It is often the case in a marriage where one spouse has tax debts, but the other does not that the husband and wife decide to file separate returns.  The strategy behind this is to protect the innocent spouse from the spouse with tax debts.

This strategy does not work in a community property state.  In a community property state, during the time they live together, each spouseMarried Filing Separately gets one half of the income, deductions, credits and withholding of the other when they file married filing separately.

The form the taxpayers should use is IRS Form 8958.  This form allocates the income, deductions, credits and withholding to each taxpayer in accordance with community property law.

You may attach your own spreadsheet bifurcating or splitting the allocation.  Community property law is foreign to most IRS computers and many IRS personnel at the Service Center.  Failure to use IRS Form 8958 may trigger many months of endless correspondence with the IRS Service Center.

Community property law has other adverse consequences to tax debtors.  When two people marry, one may have tax debt and the other may not.  The innocent spouse is not legally liable for the pre-marital tax debt of the spouse with tax debt.

However, the IRS may and will collect from the innocent spouse’s income for the other spouse’s pre-marital tax debt!  Under community property law,  to extent the innocent spouse’s income is used to pay the community expenses, the IRS will levy the innocent spouses W-2 income or social security income to collect the pre-marital tax debt.

The IRS’s ability to seize pre-marital assets of an innocent spouse is out side the scope of this blog post.  If you are an innocent spouse marrying a tax debtor and bringing substantial assets into a marriage, we encourage you to contact us to set up a pre or post nuptial agreement to protect those assets from IRS seizure.

Dana M. Ronald
Tax Crisis Institute
August 4, 2014

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