Nov 30, 2022
The first thing to understand about community property laws is that they do not apply to everyone. If you, or the taxpayer you have in mind, do not reside in the following states or did not reside in the following states when a tax debt was accrued, you can stop reading this article now! The states that have community property laws that must be considered when dealing with tax debt are:
*Three states have an “opt-in” option on this: Alaska, South Dakota, and Tennessee (isn’t there always an asterisk applicable with any topic related to taxes???)
The premise behind “community property” is such that when you are married, you legally share your income, assets, and (most importantly for this topic and how it relates to a tax bill) debts with your spouse. Community property only applies to all assets and liabilities acquired during the marriage, which are “owned” 50/50.
The original intention behind the community property notion was to make dividing the joint assets of marriage easier to distribute in the case of a divorce. “You get 50%, and you get 50%.” The ease of this process can be blessing or not.
Simply put, any property owned by a spouse prior to a marriage or any property obtained by a spouse after a legal separation are considered “separate” assets. Additionally, any gift or inheritance during the marriage from a third party can be considered a “separate” asset as long as it was a gift or inheritance left to one spouse, and the asset is not deposited into a jointly-held bank account with the non-receiving spouse, or the other spouse’s name is not added to the deed.
First, you have to remember the most important principle of community property law: both parties are equally liable for a debt accrued in during the course of a marriage. This means that, for example, even if a husband wasn’t involved with his wife’s sole-proprietorship business, if she files a Married Filing Joint tax return with him and they realize a tax consequence because of profits she earned, the taxing authorities will look to him as equally responsible for addressing the taxes owed as well.
Second, when it comes to solving a past-due tax bill, though one spouse accrued the debt, the resources and assets of both spouses in the marriage will be taken into consideration by the taxing agencies. Some assets and income considered include investments (knock, knock, is cryptocurrency there?) and net discretionary income from the non-involved spouse. This is where the ease of the community property laws can be a curse instead of the intended blessing.
Last, regarding premarital tax debts owed by one of the spouses, there are different rules for most of the community property states as set by state law. For example, in Texas, because each spouse has a half interest in community property, a Federal Tax Lien attaches to 50% of all community property. Yet, Texas law allows a creditor to reach 100% of the liable spouse’s sole- management community property and 100% of joint-management community property to satisfy a premarital debt. Does this sound confusing? Absolutely, but that’s why Golden Lion Tax Solutions is here! We are experts at knowing what the IRS can and cannot do regarding community property laws.
This situation can become tricky. Though you would think a divorce decree identifying one spouse as responsible for addressing the tax debt would indemnify the other, the IRS does not recognize a designation from the state as a way to supersede Federal Law. Referring to the example of the wife who has a tax debt from her sole-proprietorship business and filed a Married Filing Joint tax return with her husband, the courts may decree she will be responsible for paying the debt, but the IRS will not look at it the same way. Therefore, even though the decree says only one will be responsible for the debt, the IRS will still seek repayment from both. As for the states, they will handle this type of situation based on their applicable state law, with each having unique rules based on state provisions.
Absolutely not! There is always a solution… you just need the right team in your corner to find it and advocate for you and your rights! There are many facets to community property laws, and it is essential to have the right professional. So, if you reside in one of the states with community property laws and have a tax debt, we should talk. Hiring a tax debt resolution professional, such as the team at Golden Lion Tax Solutions, can ensure the rights you have, even in a community property state union, are adhered to and defended. You have heard the familiar adage, “if you give an inch, they will take a mile?” It happens, and it happens more frequently than one can imagine concerning the collection of past-due tax debt by the IRS or state. Golden Lion Tax Solutions is here to help you find the most appropriate tax debt solutions to help get you back on the path to financial freedom and stability, even if your situation is impacted by community property laws.
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Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.