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Filing Joint Tax Returns After Separation May Be Dangerous. Ownership of Life Insurance Determines Deductibility Of Premiums.

Filing Joint Tax Returns After Separation May Be Dangerous. Ownership ofLife Insurance Determines Deductibility Of Premiums

Filing Joint Tax Returns After Separation May Be Dangerous. Ownership ofLife Insurance Determines Deductibility Of Premiums

Question: My husband and I separated earlier this year and plan to be divorced next February. For most of our 27 year marriage, he has operated a grocery business, and I have been a housewife. As part of the settlement, my husband has asked that I sign joint tax returns with him for 1998 because of income tax savings. On the advice of our lawyers, he and I both extended our returns until June.

Although I know nothing about his business or the properties he sold in 1998, my lawyer tells me that I should go ahead and file jointly because my husband has agreed to indemnify me from tax liability should it arise. He tells me that there is a new law that will protect me. I still have misgivings and concerns. Am I just paranoid as my lawyer suggests? And if not, what should I do?

Answer: Since you do not know your husband's business, you were certainly wise to raise this important question. By signing joint income tax returns, you agree to be both individually and jointly liable for any tax deficiencies that may arise in the future. The indemnification you may receive from your husband is between you and him, but does not bind the taxing authorities. This means that, for example, if your husband loses everything and a problem with the 1998 return arises in the future, the taxing authority may decide to go after you for the deficiency -- and you may be liable from the assets you receive as property settlement from the divorce or from assets you may acquire after the divorce – even though there are new laws that purport to protect innocent spouses. Because you have no income, we believe that filing jointly under these circumstances poses quite a potential economic risk to you.

What can you do? You may choose to have your accountant review all underlying aspects of your husband's business and property transactions to try to make sure that everything placed on the returns is correct, but this would be an expensive task and still would not protect you fully. Or you could have your accountant compute the difference between the taxes that your husband would pay if you filed joint returns and those he would pay if his filing status was "married, filing separate." Depending on the circumstances, the tax savings might not be that much. And even if it is, you might consider reducing your property settlement by an agreed amount that will result in you sharing the tax increase with your husband and not signing the returns. We believe that your interests will be best served by not agreeing to an open-ended tax liability that could come back to haunt you.

Question: My divorce decree requires that I make my ex-wife the beneficiary of a $100,000 policy of insurance on my life and that I pay the premiums. If I die, my wife will receive the $100,000 from the insurance company. My lawyer told me that I could deduct the premiums as alimony; however, when I went to do my tax returns, my accountant told me that the premiums were not deductible. Why am I getting conflicting opinions?

Answer: Payment of premiums for a policy insuring your life that are required under the terms of a divorce decree may qualify as alimony if and only if your wife is the owner of the policy. This means that if you have given up all ownership and control through an absolute assignment of the policy, the premium payments may be deductible; however, if you pay premiums on a life insurance policy that you own and of which your ex-wife is primary beneficiary, the premiums are not deductible by you as alimony and are not taxable your ex.

That’s why it’s important that divorce documents clearly state the intent of the husband and wife, especially when it comes to taxation matters where proper drafting is essential. When tax-related conflicts arise after divorce, this generally means that the documents were poorly drafted. Jan Collins is an award-winning writer and editor.

Jan Warner is a matrimonial, elder law, and tax attorney. Both are based in Columbia, South Carolina.

Either email your questions to janwarner@flyingsolo.com or send them by mail to P.O.Box 11704, Columbia, S.C. 29211.

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