Glen Head, NY

“We just concluded out finances and separated our assets. Now you think we should file a joint return for last year?” She looked at her accountant confused.

The accountant smiled. “Well, you had large capital gains in your account and he has a large capital loss. You could save a lot of taxes.”

“But why would he want to save me money?” she asked

“Because he can't use that much of his capital loss and probably never will. And there are benefits he will have in filing a joint return too. But your attorneys will have to get involved because you'll both need an agreement about this.”

There are indeed benefits for both spouses in filing a joint return in such a situation and, like the accountant said, an agreement is most likely required in this situation. This can be the case where (i) like here, a couple is divorcing, or (ii) in a second marriage where each spouse keeps his or her finances separate for the benefit of their respective families.

One of the benefits of a joint return is that the threshold amount of adjusted gross income that will reduce itemized deductions and exemptions is higher. So too is the exemption for the alternative minimum tax.

Of course, separate returns may be more beneficial in some situations where, for example, alimony has been paid. The alimony paid can't be deducted on a joint return, but where deducted on one spouse's separate return it would have to be reported as income on the other spouse's separate return. And the lower the adjusted gross income, the more could be deducted for medical expenses and miscellaneous itemized deductions which are deductible only to the extent they exceed a percentage of adjusted gross income. In this situation, however, we are assuming that alimony has not yet been paid in the filing year. Furthermore, by being able to offset the wife's capital gains by the husband's capital losses, adjusted gross income may in fact be less on a joint return than it would be on separate returns.

However, as noted previously, an agreement may be necessary between divorcing spouses and spouses of second marriages who want to keep their finances separate. Some of the matters that should be covered in such an agreement might be:

• Who will see to the preparation of the return? Who will see to the filing? Both parties should agree to cooperate in supplying information by a date certain.

• Who will pay for the preparation of the return or if the cost is to be shared? How is it to be shared?

• In the event of tax audits (for these returns and prior filed returns), who will handle the audit? How will the professional fees be paid? Who will have the right to agree to a settlement (or upon what parameters can a settlement be made)?

• How will a tax due that may be shown on a return (or as a result of an audit) be paid? How will it be allocated? To whom will overpayments belong? Will the sharing be in the ratio of the income of each party that contributed to taxable income? On what basis will estimated tax payments (including overpayments from prior years) be apportioned between the parties? Will it be on the basis of which party made the payment? What about payments from a joint account?

Note that if joint returns were filed in the past and it is now decided that an agreement is appropriate, some of the items noted above may have to be addressed in connection with the previously filed returns.

In this situation, the wife's accountant properly recommended the possibility of filing a joint return, but he was also correct in suggesting that both her attorney and her husband's attorney be involved in considering an agreement concerning tax returns.

For more information, in the Tax Management Portfolios, see Wofford, 515 T.M., Divorce and Separation, and in Tax Practice Series, see ¶1310, Alimony, Child Support and Property Settlements.