Check Him Out

Julian Block

AS AN ATTORNEY and author who has written and lectured extensively on the tax aspects of marriage and divorce, I frequently receive questions from couples contemplating marriage. Generally, they come from similar backgrounds: They’re both affluent. They’re both getting married later in life. They’re both aware of trends in divorce rates.

I urge couples considering marriage to ponder the tax consequences beforehand, especially when one or both of them are remarrying. To illustrate how I’d advise them, let’s say it’s going to be a second or third marriage for both John and Marsha—something that’s not uncommon nowadays, judging from The New York Times’s Sunday Styles section reports on weddings.

Something else that’s no longer uncommon: Her holdings considerably exceed his. Possible reasons she’s wealthier: She was enormously enriched by her former employer’s IPO; much-married and several-times-widowed, Marsha inherited assets from her spouses; or a couple of divorces resulted in her receiving several sizable settlements.

Both Marsha and John are old enough for AARP membership. Why do their ages matter? While divorces among younger adults are becoming less common, so-called gray divorces among those age 50 and older are increasing. And since remarriages tend to be less stable than first marriages, divorces among those 50-plus and remarried are about double the rate for those who’ve only been married once.

John and Marsha were already mindful of those stats. They met with financial professionals who offer premarital financial planning. She also had him assent to a prenuptial agreement, just as she did in advance of earlier marriages.

What else might Marsha do? I counsel her to ask for copies of John’s federal and state tax returns. Depending on what they reveal, she might decide that it’s prudent to stay single or, if they do wed, to file separate returns.

Following are summaries of scenarios I created that, albeit unromantic, are based on actual events.

Fear of filing. Suppose it turns out that John has no copies, as he hasn’t filed tax returns, something that’s common across all levels of society. I tell Marsha to find out his potential liability for back taxes, penalties and interest, and also when he’ll file returns and arrange for installment payments that’ll square him with federal and state tax agencies.

My advice, should Marsha wed: She ought to file separate returns and not mix her assets with his. In addition, she should ask John what other shoes might drop.

A less troubling, but still problematic scenario. While John has filed 1040s, he owes considerable amounts in back taxes, and interest charges continue to mount. Marsha’s tactic, assuming they wed: Again, file separately and don’t comingle assets until he has squared accounts with the IRS. I remind her of a snag if they file jointly and are due a refund: The IRS can apply the refund to his back taxes.

John has filed returns and owes no back taxes. That’s good news. But Marsha should still scrutinize his 1040s, because they can offer all kinds of insights into John, both financial and otherwise. Below are eight such items:

1. Alimony payments. On the front of a 1040 will be deductions for alimony payments to John’s ex-wives. Did he tell Marsha about those payments?

2. Dependency exemptions for children. A divorce settlement (or settlements) allows John as a noncustodial parent to claim such exemptions. The place to claim them is on the front of a 1040. Had he told Marsha about those children?

Keep in mind that, under 2017’s tax law, personal exemptions won’t be allowed starting with the 2018 tax year, and the deduction for alimony payments won’t be available to those divorcing or signing separation agreements in 2019 or later years.

3. Gambling. John’s returns show substantial amounts of gambling winnings as the source for “other income” on the front of his 1040s. While the IRS allows him to offset those winnings with deductions for gambling losses, losses are deductible only up to the amount of winnings. I caution Marsha to ask whether, in the past, he’s incurred nondeductible losses that far exceed his winnings. If so, the amounts John wagered might indicate that he’s a compulsive gambler.

4. Medical expenses. At the top of the Schedule A, John claims hefty deductions for medical expenses. In 2017 and 2018, they’re allowable only for the part above 7.5% of adjusted gross income. True, he might be able to easily explain the deductions as attributable to payments for insurance premiums and expenses usually not covered by insurance, such as dental work, hearing aids, glasses, medically required home improvements or private duty nurses.

But I point out to Marsha that there could be another reason for substantial write-offs: John sees a psychologist or psychiatrist. There’s nothing wrong with that. But Marsha should know what issues John is grappling with—and also share the emotional struggles she has.

5. Donations. John’s Schedule A shows he’s a chintzy contributor, whereas Marsha’s return shows she’s a generous giver. While that needn’t be a deal breaker, they should discuss donations before marriage.

6. Schedule C. As John operates his dental practice as a sole proprietorship, he files a Schedule C. A cursory review of the amounts entered for business receipts and expenses suggests he’s understating gross receipts and overstating expenses. Whereas dentists in his area typically claim expenses equal to about 50% of gross receipts, his expenses equal about 75% of gross receipts.

A plausible explanation for the discrepancy: John doesn’t deposit cash payments received from patients into the practice’s bank account, and he tells his accountant to use bank deposits to calculate gross receipts. Marsha shouldn’t hesitate to ask John whether he’s trying to pull one over on the IRS.

7. Withholding. Like millions of other Americans, John receives big refunds every year, either as a deliberate form of forced savings or simply by neglecting to claim enough exemptions on his W-4.

But interest-free loans to the IRS are anathema for someone like tax-savvy Marsha, who meticulously monitors her withholding from wages and outlays for estimated payments, and thus files tax returns that usually show small balances due. Filing jointly could mean that they receive no refunds. That could be a big disappointment for John, who is used to getting checks. It’s a good idea for them to discuss how they’ll handle withholding.

8. Midst these thorns, there are some roses. Assume John’s Schedule D shows a substantial capital loss carry forward. Meanwhile, he has no unrealized capital gains. At $3,000 a year, it will take many years for him to use up his carryforward. Marsha, however, has a substantial unrealized capital gain. Marriage means she can realize the gain and offset it against John’s carryforward.

Similarly, suppose he operates a business that’s unprofitable. He has a hefty net operating loss carryforward, but not enough other income to absorb the carryforward. Marsha has sizable income. Marriage enables him to apply his carryforward against her income.

Julian Block wrote and practiced law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). He died in 2023. Check out the articles that Julian wrote for HumbleDollar.

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