Don't let romance wreck returns
By HELEN HUNTLEY
Published February 12, 2006
Love, romance and income taxes: what a trio! This year I've been hearing from newlyweds worried that their spouses' back tax debts and unpaid child support will result in their own refunds being confiscated.
They've got reason to be concerned.
The federal government withholds tax refunds for overdue taxes, child support, student loans and other federal debts. Marrying somebody who owes that kind of money doesn't make you responsible for their debts, but if you file a joint return with them, your refund could be withheld too.
How should you deal with it?
For your 2005 tax return, you have two choices.
Option 1 is to file jointly and file Form 8379 claiming "injured spouse" status. The form can be filed with your return or after the fact if your refund has been confiscated. It asks you to allocate income, deductions and taxes withheld between you and your spouse.
Option 2 is to file separately. The IRS penalizes "married filing separately" status by disallowing some tax breaks afforded other filers. Calculate your taxes both jointly and separately to find out how much you would lose by filing separately so you can make an informed decision.
Even if it is costly, separate filing may be the best option if your spouse is in trouble with the IRS and you want to avoid involvement. I strongly recommend separate filing if you suspect your spouse is not being completely honest in the information currently being reported to the IRS. The IRS can come after you for taxes due on a joint return and even if you don't think you are responsible, you will have a serious tax problem. (See IRS Publication 971 to learn about claiming "innocent spouse" relief.)
Of course, prevention is always better than a cure, so now is the time to take steps to make sure you don't have problems next year.
First, adjust your withholding so there won't be a refund on your 2006 return. If you are entitled to the Earned Income Credit, you can arrange to receive it in advance in your paycheck. If you use a refund as forced savings, sign up for payroll deductions and send money to the company credit union every week instead of to the IRS.
Second, keep your assets separate to avoid the possibility of liens or seizure related to your spouse's debts.
Third, work on a plan for dealing with the underlying problem. Catching up on child support payments should be a top priority because children need and deserve the financial support of both parents. The IRS will consider an installment plan for a tax debt that can be paid and an "offer in compromise" to settle one that is so large it cannot be paid.
I am trying to buy some property, but every time I speak to someone, they give me the runaround. I am thinking of buying a condo, but don't know where to go or whom to speak with to advise me.
You might benefit from a class or program for first-time home buyers. These are offered by local governments (check with the city and county where you live), consumer credit counseling agencies, community service groups and mortgage lenders. Listings of these sometimes appear in the Times.
Another place to start is with a mortgage lender, such as the bank where you have your checking account. Ask about prequalifying for a mortgage so you will have an idea of how much you can afford to spend on a house.
You also might find it helpful to get a book such as Home Buying for Dummies by Eric Tyson and Ray Brown.
This will be the first year I am eligible to contribute to my company's 401(k) retirement savings plan, which I will be doing. Will I also be able to continue putting money in my Roth IRA in 2006?
Yes, as long as you don't make too much money. Eligibility is phased out starting with incomes of $95,000 (single) and $150,000 (joint).
--Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to hhuntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.