Tax Liability of Spouses for Marital and Separate Property

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Most couples come into a marriage with some existing income and assets that may generate tax liability. What responsibility each spouse has for the taxes generated by the other’s assets can be complicated. Tax rules and matrimonial law affect liability during marriage and divorce.

In a divorce, property is put into two categories: separate property and marital property. Separate property is property that is either acquired before the parties’ wedding date, by gift to one party that can be proved as such, or through inheritance during the marriage. Absent specific circumstances, separate property exclusively belongs to the spouse owning the property. Marital property is property that is acquired after the parties’ wedding date. When a couple divorces, most, if not all, marital property is divided between the parties.

When spouses are divorcing, the funds previously used to pay taxes on marital and separate property can become an issue. Generally, there are two scenarios:

  • Taxes on separate property paid with marital property. When the couple uses marital assets to pay taxes generated by separate property, the spouse not entitled to the separate property can get a 50 cent on the dollar credit for his or her share of the taxes paid when the spouses divorce. For example, one spouse has an inheritance in a separate account. If the taxes on the inherited funds are paid from a joint bank account, the spouse who does not have rights to the inheritance can get the aforementioned 50 cent on the dollar credit on the amount paid from marital property in taxes for the separate property.
  • Taxes on marital property paid with separate property. When one spouse’s separate assets (ex. an inheritance) are used to pay taxes generated by marital property, the amount paid from separate assets is considered a gift to the marriage absent certain exceptions, and no credit is owed to the spouse who used his or her separate assets to pay the tax bill. However, any inheritance money retained in the separate account remains separate property. Only the portion used to pay taxes on marital property would likely be considered a gift.

Under New York divorce law, this result does not change even if the couple files separate tax returns. However, under tax law, whether they file jointly or separately does affect their liability for taxes. When spouses file jointly, each spouse is fully liable for the joint taxes owed. For those spouses filing separate returns, each spouse is only personally liable for their own tax bill as noted on his or her separate return.

If you are married or getting married and have separate property, contact us for advice on how to protect your property. If you are considering divorce, we can help you get the best result in your matter.

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