As an attorney and author who has written and lectured extensively on the tax aspects of marriage and divorce, I frequently receive questions from couples contemplating marriage.
Generally, they come from similar backgrounds. They are usually both affluent and they are both getting married later in life. They are both aware of trends in divorce rates.
I urge couples considering marriage to ponder the tax consequences beforehand, especially when one or both of them are remarrying.
To illustrate how I’d advise them, let's say it's going to be a second or third marriage for both John and Marsha—something that’s not uncommon nowadays, judging from The New York Times’s Sunday Styles section reports on weddings.
Something else that’s no longer uncommon: her holdings considerably exceed his.
Both Marsha and John are old enough for AARP membership. Why do their ages matter? While divorces among younger adults are becoming less common, so-called gray divorces among those aged 50 and older are increasing. Since remarriages tend to be less stable than first marriages, divorces among those who are 50-plus and remarried are about double the rate for those who’ve only been married once.
John and Marsha were already mindful of those statistics. They met with financial professionals who offer premarital financial planning. Marsha also had John assent to a prenuptial agreement, just as she did in advance of earlier marriages.
What else might Marsha do? I would counsel her to ask for copies of John’s federal and state tax returns. Depending on what they reveal, she might decide that it’s prudent to stay single or, if they do wed, to file separate returns.
Following are summaries of scenarios I created that, albeit unromantic, are based on actual events.
Fear of Filing
Suppose it turns out that John has no copies, as he hasn't filed tax returns, something that’s common across all levels of society. I tell Marsha to find out his potential liability for back taxes, penalties and interest, and also when he’ll file returns and arrange for installment payments that’ll square him with federal and state tax agencies.
My advice, should Marsha wed: She ought to file separate returns and not mix her assets with his. In addition, she should ask John what other shoes might drop.
A Less Troubling, But Still Problematic Scenario
While John has filed 1040s, he owes considerable amounts in back taxes, and interest charges continue to mount.
My advice: Again, file separately and don’t comingle assets until he has squared accounts with the IRS. I would remind her of a snag if they file jointly and are due a refund: The IRS can apply the refund to his back taxes.
John has Filed Returns and Owes no Back Taxes
That’s good news.
My advice: Marsha should still scrutinize his 1040s, because they can offer all kinds of insights into John, both financial and otherwise.
In the following two columns, I’ll discuss eight such possible items.
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.