Am I Liable for my New Spouse's Old Tax Debts?

I get this question a lot from recent newly weds.  Often, one of the spouses has racked up a massive tax bill and the "nonliable" spouse is worried that his or her assets will now be subject to IRS lien and levy procedures.

If you've just gotten married and your spouse's tax debts arose prior to marriage then you will have to work through a maze of California State and Federal rules to determine whether your assets can be attached by the IRS.

First, it is helpful to keep in mind that under federal law, the IRS (as a creditor) steps into the shows of the taxpayer and that state law determines a taxpayer's property rights to property.  Because a federal tax lien against one spouse attaches to all of that taxpayer's property and rights to property in a community property state, the lien would attach to the liable spouse's one-half ownership interest in all items of community property. 

In addition, in California, often times a private creditor has the right to collect a debt from all or part of both spouses' interests in community property. (See Fam. Code 910.)  In other words, California is known as a 100% State, which means that the IRS (like other creditors) can collect from 100% of the community property for all the premarital tax debts of a spouse. 

California does make a key exception to the nonliable spouse's wages that are earned after the marriage.  As long as these wages are deposited into an account only in the nonliable spouse's name (and over which the liable spouse has no control or access and has not commingled funds), then these assets will not be subject to levy. (See Fam. Code 911.)   However, if these funds are then used to purchase real property or vehicles, then such assets would then be subject to potential IRS lien and levy.

One way to protect additional community property assets would be to have the couple enter into a post-nuptial agreement whereby the spouse with tax issues would waive any community property interest in the other spouse's future earnings or property.  Of course, this should only be done after careful consideration of all the relevant facts and circumstances and may be subject to challenge by the IRS as a fraudulent transfer.

"Gentle Soul" Shoe Shiner Donates $200K to Charity--But Beware of the Tax Man

From WTAE Pittsburgh:

For 32 years, [Albert] Lexie has been examining his schedule each morning, like a doctor on the clock. But the longtime shoe shiner’s gift isn’t healing, it’s giving back. A shoe shine costs $5, but Lexie said customers have been generous with their tips since he started working at the hospital in 1981.

“Most of them give $6, some of them give $7,” Lexie told Channel 4 Action News anchor Wendy Bell.

And Lexie gives every cent of his tips back to the children.

“I think he does it because he loves the kids,” said Dr. Joseph Carcillo. “He's donated over a third of his lifetime salary to the Children’s Hospital Free Care Fund.”

The money goes to parents of sick children who can’t afford to pay medical costs.

“He's a philanthropist, is what he is,” said Carcillo. “He's an entrepreneur.”

Lexie has donated $200,000 to the cause, bringing in several hundred dollars a week.

No doubt about it.  Mr. Lexie has quietly and consistly done something noble and great by turning over his tips to a worthwhile charity.  However, this raises some very interesting tax implications.  In particular, it is well-settled that amounts received as tips are "income" for income tax purposes and should be reported on a person's tax return.  Now you would hope that the fact Mr. Lexie simply donated these funds to charity would absolve him of any tax liability for those tips, but that isn't necessarily the case.  The reason why is that one's charitable donations are not always 100% deductible.

In this case, it is likely that Mr. Lexie could only deduct these donated tips up to 50% of his adjusted gross income (and remember his AGI would include this tip income).  If, for instance, his donated tips ever exceeded 50% of his AGI, then he would not be able to deduct the full amount of donated tips that year.  While these excess donations can be rolled over for up to 5 years, it doesn't do Mr. Lexie much good if every year he is maxing out this deduction limitation.  On a related not, it is unclear what documentation the hospital has provided Mr. Lexie each year that would enable him to substantiate these deductions, if ever questioned.

In all, Mr. Lexie has done a noble thing...let's just hope the IRS doesn't take notice. 

Sacramento Man Hit With 17 Year-Old Tax Bill

Bill Elkins, a 66-year-old man from Sacramento was recently hit with a $6,166.39 tax bill from the Franchise Tax Board involving a tax debt from 1995.  The state says he never paid it.  Mr. Elkins claims he did.

Unfortunately for Mr. Elkins, his bank records don't go back that far to prove he ever made that payment and the CPA who prepared the return has passed away.  While the IRS can collect on 10 year-old assessments, the Franchise Tax Board can collect on 20 year-old assessments.  Local news video below.