Jodi Amos still shakes her head recalling the person who tried to cash a six-figure tax refund check without her ex-husband knowing.
“The bank stopped her because the refund check was in joint name and she wanted to deposit it into an account with only her name,” said Ms. Amos, a financial adviser and certified divorce financial analyst at 4Rivers Wealth Management in Green Tree.
What to know
The filing deadline to submit 2022 tax returns or an extension to file and pay tax owed is Tuesday, April 18, for most taxpayers. By law, Washington, D.C., holidays impact tax deadlines for everyone in the same way as federal holidays. The due date is April 18, instead of April 15, because of the weekend and the District of Columbia’s Emancipation Day holiday, which falls on Monday, April 17. Taxpayers requesting an extension will have until Monday, October 16 to file.
Visit irs.gov for questions and check the status of your refund.
The ex-husband was her client, and the check needed his signature. A bank officer later informed the man that his ex-wife tried to deposit the $680,000 tax refund check without him.
Tax season is stressful enough for everyone.
But when it involves couples who are either divorced or going through a split, it can lead to a complicated tangle of conflict, according to financial and legal professionals who work with divorcing couples.
The number of divorce filings in Allegheny County shot up to 2,259 by the end of last year from 2,025 filings in 2020, according to Allegheny County Civil Court records. Statewide divorce filings jumped from 28,884 in 2020 to 31,691 in 2021, according to the Pennsylvania Department of Health.
With the federal tax deadline on April 18, people recently divorced or in the process of divorcing are making major decisions, maybe for the first time: What marital filing status should I to use? Who gets to claim dependent children for tax deductions? How do we handle money owed to the government, or divide any tax refund?
And breakups are often not amicable — which can make tax planning more nerve-racking than usual.
Finding out the hard way
Divorce experts who’ve seen all sorts of financial shenanigans between splitting spouses say tax issues can often be one of the thorniest areas of settlement negotiations, especially in high net worth divorces.
But ex-husbands and ex-wives at any income level could be vulnerable if either one feels the need to even the score, and if there’s tax money up for grabs.
Rick Julius, a senior litigation partner at Cordell & Cordell, Downtown, said one of the most common ways ex-spouses abuse each other through the tax system is by claiming children as dependents when they legally should not.
It’s a valuable deduction — $2,000 for each child, for most taxpayers.
“Even if you are 100% entitled to claim the children with a court order that says you can claim the children, if the other side does it before you do, there’s nothing you can do to force your electronic return through,” he said.
The IRS will pay the credit to the first spouse who claims it, Mr. Julius said.
“The IRS will have already flagged those Social Security numbers for the kids,” he said. “Now, you can get a court remedy for it. But anytime you do that, you’re spending money to get that money back.”
Cordell & Cordell markets itself as a law firm for men in divorces. But the St. Louis, MO-based law firm also represents a growing number of women.
Mr. Julius said many ex-spouses cashed stimulus checks during the pandemic when they weren’t supposed to, and that it happens every year with income tax refund checks. Some divorced people find out the hard way that keeping joint bank accounts open after a marital breakup can be bad idea, he said.
“If an ex-spouse gets a check from the U.S. Treasury they can deposit that check into a joint bank account if it bears both names,” he said. “But it only takes one person to withdraw the money.”
In high net worth divorces, Ms. Amos is always on the lookout for the spouse who wants to pick and choose assets from an investment portfolio.
“From a tax perspective, the number one cause of inequality is when one partner who is more investment savvy wants to split the assets 52% to 48% — but they want to cherry pick what assets they’re getting,” she said. “Even though they are taking a lower percentage, they know an asset’s market value and net value are very different. Their 48% cut would be worth even more than the 52% after taxes. That’s not equitable.”
Assets with a higher cost basis — meaning, a higher total amount originally invested — yield lower capital gains and are subject to lower taxation. That’s why the market value of some assets could be lower when taxes are factored in.
Divorced, but filing jointly
When people go through a legal separation or divorce, the change in their relationship status also affects their tax situation.
A couple’s marital status on December 31 determines how the individuals file tax returns. If they were divorced prior to that date, they file either ‘single’ or ‘head of household’. Married couples can file either ‘married filing separate’ or ‘married filing jointly’.
Of all filing statuses, the most tax advantageous is “married filing jointly” because it has the lowest tax rate and most deductions, among other benefits.
Image DescriptionJodi Amos, a financial advisor for 4 Rivers Wealth Management, in her Greentree office on Tuesday, March 28, 2023. This is a caricature given to Mrs. Amos by a former assistant when 4 Rivers first opened. (Lucy Schaly/Post-Gazette)
“Sometimes what we’ll see is one party that doesn’t pay taxes all year long, and then at tax time they’re willing to get along with the other party who is a W-2 employee,” Mr. Julius said. “They come asking if they could just file married jointly and then either split the refund or the tax liability. You see this particularly with 1099 employees or K-1 business owners where there may be a huge tax liability.”
He advises W-2 employees who have been paying taxes all year through payroll deduction to think twice before filing married jointly with spouses who are contract workers and business owners during a divorce. His suggestion: Have an accountant prepare both an individual return and joint return to see the comparison.
When married taxpayers file joint returns, both spouses are responsible for all of the taxes due on that return. Even if the couple later divorces, the shared tax debt will follow them.
“There’s that propensity to think that because you’re filing married joint the only person getting the losing end of this is Uncle Sam,” Mr. Julius said. “But if someone is cunning enough on the other side they could be taking advantage of you and Uncle Sam.”
Ms. Amos said the six-figure refund check her client shared with his ex-wife was a tax credit from the sale of a multi-million dollar business they co-owned. The wife filed an amended return for the tax credits, and the U.S. Treasury mailed the refund check to her.
“I’ve been doing this for more than three decades and every time I think I’ve seen it all, something else happens,” Ms. Amos said. “What would have happened if the check was only $3,000? Would the bank have taken it? Because of the dollar amount, there was no way that was going through.”
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