Who keeps the tax refund?

March 10, 2017 Post-Divorce, Property, Debt, & Finances

This is the time of year that we field a lot of questions from clients, and people seeking general information on how to file their income tax returns and who gets to keep the tax refund. People going through a divorce start to think that if they file separate, but married income taxes for the previous year, and they are entitled to a refund, that they can keep that refund. Those same people probably also think, or are going to argue that if they owe money and there is a tax liability, that their spouse owes half. So, which is it?

Let’s talk first on how to file. When married and going through a divorce in the year preceding what is anticipated to be the year you will be divorced, you have the option of filing joint income taxes with your spouse, or separate but married. The joint tax rates are usually more favorable than filing separate, but married. If legally separated, one also may qualify for filing as head of household status. There is some debate over the issue whether a divorce court has the authority to order a couple to file joint income taxes, but in Tax court decisions that I have read, the general consensus is the state courts lack authority to override one’s right under the IRS code, as to how they wish to file their income taxes.

In the year of the divorce, your filing status is single no matter what time of the year you are divorced. You cannot file a joint income tax return in the year you are divorced. For the year of the divorce, you will be filing as a single tax payer or if you qualify, under head of household status.

Things get further complicated by the fact that Wisconsin is a marital property law state. So, if you file separate but married for the preceding year, instead of taking advantage of the joint tax rates, technically, you are required to comply with Marital Property law requirements as regulated by the Department of Revenue and file claiming 1/2 of the other spouse’s income, deductions and withholdings, and the same holds true for them. In the year of the divorce the same rule applies, in the absence of the parties’ having signed a tax reclassification agreement for the year of the divorce. Under Marital property law tax reporting requirements in the state of Wisconsin, each of the parties are required to report 1/2 of each other’s income, deductions and withholdings from the first of the year until the date of divorce. After the divorce date, each party is required only to report their own income.

Now, on to that elusive tax refund. If you opt to file separate, but married for the preceding tax year and you are entitled to a refund, the trial court does have discretion to treat that refund as income to be used for support purposes or may treat it as a property right and force you to give half to your spouse. Same is true for any tax liabilities owed by either of you. You are married until you are divorced and based on joint income earned, the trial judge may decide to allocate an equal responsibility to both parties for either the wife or the husband having a tax liability, absent some showing that the other party intentionally or deliberately caused a tax problem by under withholding.
Any tax refunds received during the period of time the parties were married, are fair game for the other spouse to claim 50% of the refund. You are married until the day you are divorced, so expect the trial court to treat any refunds and/or liabilities as a joint marital asset or obligation if money is owed, as the case may be. So, before you rush off to file separate, but married tax returns for 2016 thinking you will be able to keep your refund, think again. You are hurting yourself financially as the joint tax rates usually are more favorable than filing separate, but married, you still must comply with Wisconsin’s marital property law requirements, and the kicker is any refund you receive, expect the trial judge to order you to pay over half to your spouse.

If you have tax questions relating to getting a divorce in Wisconsin, contact the experienced family lawyers at Karp & Iancu, S.C. today.