The term non liable spouse refers to someone who is not liable for tax debt. You may find yourself asking, “what is the purpose of claiming non liable spouse?” Often times, spouses combine their finances together in order to avoid the burden of filing two separate tax returns. Although this practice is typically beneficial, there is always the rare occasion in which one spouse may be considered a non liable spouse. In that case, it may be more advantageous to file separate tax returns.
How To Determine If You Are A Non Liable Spouse
Simply put, a non-liable spouse is the partner who does not owe tax debt. For example, Michael and Fiona are a married couple that files separate tax returns annually. Michael has accrued tax debt over the years and therefore is considered the liable spouse. Fiona, on the other hand, is the non liable spouse.
However, keep in mind that you don’t necessarily have to be married to someone in order to claim the non-liable spouse status. In fact, a non liable spouse can also be the partner that the taxpayer lives with. This exception also applies if the non married couple share bills, co-mingle funds, have bank accounts together and even have children together but are not married.
Income And Expenses
For the liable spouse that owes in back taxes, the IRS considers the non-liable income and expenses as well. This requirement is set in place to allow the Internal Revenue Service (IRS) to determine how much the taxpayer can afford to pay monthly.
For example, Michael owes the IRS $50,000 for tax years 2015 and 2016. Michael married Fiona in 2018 and they have filed joint tax returns ever since. The couple did not owe the IRS any tax debt for 2018.
Michael and Fiona also do not receive any refunds when they file their taxes. They file and pay their taxes by April 15 of each year. In order to properly determine the income allocation, you must provide the total household income and total house hold expenses.
Michael makes $3000 monthly (43%) and Fiona makes $4000 monthly (67%). The couple’s total household income is $7,000 while their household expenses are $8,000.
The IRS will likely determine that as Michael is earning 43% of the household income, he is responsible for paying 43% of the household expenses. Therefore, the Michael doesn’t have any disposable income left at the end of the month.
In this situation, Michael owes the IRS $50,000 for tax years 2015 and 2016. Michael married Fiona in 2018 and the couple has filed joint tax returns since then. Additionally, Michael and Fiona receive annual tax refunds which are kept by the IRS to pay off John’s back taxes from 2015-2016.
In this scenario, Fiona is considered the non liable spouse even though the couple filed joint tax returns for tax years 2018, 2019, and 2020. Fiona is not responsible for any debt accrued by Michael prior to their marriage just because the couple filed joint tax returns after marriage. Additionally, Fiona may also file for Injured Spouse status in order to claim her portion of the refund. The couple may still continue to file joint tax returns in order to secure the benefits of doing so. However, if Fiona wants to claim her portion of the refund then she must file for Injured Spouse status annually.
Michael owed the IRS $50,000 for tax years 2015 and 2016. Michael and Fiona got married in 2018 and have filed joint tax returns since then. Although the couple did not owe any taxes for 2018, they did accrue debt in 2019 and 2020.
In this example, Fiona cannot be considered a non liable spouse. Although Fiona is not liable for Michael’s debt from 2015 and 2016, she is liable for tax years 2019 and 2020. Both Michael and Fiona’s income will contribute towards resolution in this case.
Providing Information on the Non Liable Spouse
Taxpayers often don’t want to provide the non-liable person because they feel that it might get them in trouble but what taxpayers fail to realize is that the IRS already has the information on file. The IRS already has both spouses’ information and is likely aware of the non-liable spouse’s income. Providing the proper income is simply to ensure a smoother process with no surprises and a structured resolution.
Rajneet Kaur, EA, MBA, Certified Tax Resolution Specialist is the Company Director of LifeBack Tax. LifeBack Tax is a tax resolution firm based in Chatsworth, CA that specializes in determining structured solutions for clients who owe back taxes to the state or IRS. With over 16 years of experience in the industry, Rajneet and her team have been able to resolve state and IRS debts for countless clients across the nation! To get in contact with Rajneet and the LifeBack team, call (855) 605-1500 or send an e-mail to [email protected]