Spousal debt may impact your tax return
Filing income taxes jointly with a spouse can open up more opportunities for tax credits and deductions and potentially lead to larger refunds. While married couples who file joint returns typically enjoy additional benefits than their single counterparts, this is not always the case.
Some circumstances - particularly those in which one spouse is indebted to the Internal Revenue Service or other entities - can affect both partners' returns and refunds if they file together. Therefore, there are certain scenarios in which individuals who don't want to lose their tax refund might consider filing a separate return. The IRS and state governments are permitted to use a person's tax refund to cover a list of other debts or liabilities. For instance, parents who have entered into a custody agreement with a former spouse and have not met their obligations may see their tax refund seized in order to cover back child support payments.
The same is true for borrowers who have become delinquent on federal student loan payments. Educational debt is typically not discharged in bankruptcy, and those who have failed to make payments can see their refunds seized, wages garnished, bank accounts frozen and even face legal action. Another scenario that may result in the reduction or forfeiture of a tax refund involves overpayment of unemployment benefits. Those who have been receiving jobless benefits in excess of the amounts they should have received might lose part of their refund to cover the difference. Lastly, individuals who owe state or federal tax liabilities might not be entitled to their refunds, which will instead be used to cover these payments.
Spouses can protect their refunds
Many spouses may be surprised to learn that their refund might also be reduced and put toward their partner's debt if they file jointly. To avoid this scenario, they might consider filing separate returns to ensure they receive the full amount they're owed by the IRS. In addition, it may be helpful for both spouses to speak to a tax preparer to determine how to avoid these types of situations in the future. For example, getting caught up on student loan payments and custody terms may help individuals avoid losing their refunds. Those who owe money to state and federal tax agencies should also speak to their tax professionals to determine if they qualify for an installment program that allows them to repay their liabilities over time.
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