One of the benefits of switching from filing single to married filing jointly on your tax return is having additional tax advantages including higher standard deductions, favorable tax rates, and a higher combined income before becoming subject to credit limitations. Despite sounding like a dream come true, there is also a potential downside that you and your spouse should be aware of. If one spouse owes a debt, the joint tax return could be withheld in order to pay down the balance, regardless of the other spouse’s lack of debt.
Here is how it works: you and your new spouse prepare and file your first joint tax return as a married couple. Good news, you are due a refund! However, a few weeks pass and instead of receiving a refund from the IRS, you open a notice informing you that part—or all—of the refund was applied to a past debt of your new spouse. Now what?
When someone has a debt obligation that has not been fully paid, their tax refund (which now includes yours) can be withheld by the IRS to help satisfy the debt. These debts can include federal or state back taxes, unemployment compensation debt, past due child support, or unpaid student loans. If the debtor gets married and files a return jointly with their new spouse, the entire refund can be taken to pay down the debt.
Is there anything you can do? Good news! There may be a way to recoup your portion of the refund if the debt existed before the marriage. The spouse not attached to the debt is considered an “injured spouse” and can file a form claiming their portion of the refund. The Injured Spouse Allocation (or Form 8379) can be filed with the IRS to receive your stake in the refund. Unlike many other IRS forms, Form 8379 does not need to be filed with the tax return to be effective. You can file the form separately , even after you have received a withholding notice. One important thing to note is that the relief is not automatic each year after the first form is submitted. A new form will need to be filled out and submitted each year that you seek to have your portion refunded. Once the IRS receives the completed form, processing can take anywhere from 8-14 weeks.
Sounds good, you just fill out the form and receive your half of the refund, right? Well, not exactly. If you live in a community property state , meaning that spouses who acquire property during marriage own property equally, 50/50. Depending on where you live, certain rules are applied to determine how much of the refund is yours. For instance, Texas and California are both community property states, however, both states use different ways to determine how that community property can be divided in terms of an injured spouse claim. The way your state determines community property will affect how much of the refund can be applied to outstanding debt and how much you are eligible to keep.
The allocation calculation can be complex, but we at ADKF are here to guide you. It is important to reach out to a tax professional if you believe you might qualify as an injured spouse. At ADKF, we are with you all the way and can assist you in reclaiming your refund.