Yesterday, the IRS formalized tax filing rules for gay married couples. Of particular note, like heterosexual couples, gay couples must file either joint or separate. Married gay couples, regardless of state law, cannot file single. When trying to decide whether or not to file joint or separate on a 1040 form (or even when amending past returns to claim refunds), these are three things every gay couple must consider in order to make the optimum decision on whether to file jointly, or separate.
How much money will you save by filing a joint tax return?
This is a critical question. While there may be a tax benefit to filing a joint tax return, it is essential to know exactly how much it is. Why? Because there are two serious risks we will discuss below. The only way to know how much you save is to actually prepare returns both ways to see what the savings, if any, are for filing a joint tax return. IRS tax brackets will not give you an accurate figure.
If you file a joint tax return, your spouse could be on the hook for a tax bill they weren't a part of
This is critical to consider. Suppose one spouse is a W-2 Art teacher, and the other is self-employed as a restaurant owner and is a dual citizen who inherited some wealth. There is little risk for audits or any additional assessments for the art teacher spouse. There isn't much the IRS can get, assuming the tax returns aren't wildly fraudulent.
Now, let's look at the tremendous risks the self-employed dual citizen spouse with assets has, and how those risks may be transferred to an innocent spouse:
- Audit risk: The IRS may audit the business and stick both spouses with a tax bill.
- Unpaid payroll taxes: If payroll taxes aren't paid, the IRS will assess a trust fund liability against responsible parties. Here's the thing: If a couple files joint, even though one spouse had nothing to do with the business, the trust fund liability will be charged against both spouses' accounts.
- Unreported foreign accounts: The dual citizen spouse also had assets, some of which are likely offshore. Here is where heavy penalties for not reporting foreign accounts correctly can be assessed against a spouse who had nothing to do with the offshore accounts.
Criminal liability for spouses who file a joint tax return
One of the favorite tactics of the IRS Criminal Investigation Division is to indict both spouses in a federal tax crime if they filed jointly. This is done even when they have a good idea that one spouse was not culpable of a tax crime committed by the other spouse. Why? The reason is because it puts incredible pressure on the culpable spouse to accept a very lousy plea deal. It puts a lot of pressure on the culpable spouse not to take a case to trial — just to end the strain such an indictment on an innocent spouse can create. It's sort of a dirty trick, but that doesn't stop it from being an actual risk.
Conclusion
Before signing a joint tax return think about the risks. One should not diminish the fact that one of the long-recognized purposes of marriage is to protect and grow wealth. It may not make sense to file a joint tax return, when doing so could undermine the very reason for marriage in the first place.
