Folks married to tax cheaters among those helped by new law

Staying Ahead

August 03, 1998|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

THE NEW TAX LAW Congress passed in July is going to make life easier for a lot of us. Are you in one of the categories below?

Is your spouse a secret tax cheater? Formerly, the IRS could come after you if your spouse underreported his taxes on your marital return. When you file jointly, you are normally liable for all the taxes due.

Some husbands get stuck with the taxes of a dishonest wife, but usually it's the other way around. The men skip out; the Internal Revenue Service nails the women for taxes, interest and penalties.

The new law rescues certain spouses who innocently signed a bad return. You qualify for protection if you're divorced, widowed or legally separated, or have lived apart from your spouse for the past 12 months.

Spouses on their own are responsible only for the taxes due on their individual incomes. You don't owe the tax that your spouse attempted to evade.

You'll need an accountant to help you divide the income and deductions. If you reported all your income, your share of the tax has already been paid. To collect more, the IRS is going to have to snare your spouse.

The new law also helps innocent spouses in community property states. Formerly, you could be liable for the unpaid tax on returns that your spouse filed separately. Now, the IRS can let you go.

But the law still discriminates against an innocent spouse who stays married, in any state. You can apply to have your personal income and property protected from seizure, but the IRS has a lot of leeway to say no.

No spouse will be helped automatically. You will have to file a special IRS innocent spouse form, which should be ready within 180 days.

You have two years to file the form, starting from the day the government tells you that you're liable for the tax. The new innocent spouse rules apply to all future cases and start the two-year clock running on all cases currently outstanding. But if you've already reached an agreement to pay the IRS, you're stuck.

Did your investments prosper? Last year, Congress created a monster of a capital gains tax, with three rates and three holding periods. This year, it cleaned up its mistake.

You now get favored tax treatment on investments held for more than 12 months.

For most long-term capital gains, the tax is 10 percent if you're in the 15 percent federal bracket and 20 percent in all other brackets. Long-term gains on collectibles are taxed in your bracket, to a maximum of 28 percent. This makes stocks and stock-owning mutual funds even more interesting than they were before. The law covers any gains taken since Jan. 1, 1998.

Did you buy a house recently, only to learn that you'll have to move again?

Most people no longer owe a capital gains tax on the profit they make on their homes, as long as they live there for at least two of the five years prior to the sale. Singles can exclude up to $250,000 in profits from tax; married couples can exclude up to $500,000.

The new law clarifies how you're taxed if you have to move before two years are up. You get tax relief if the move is forced by your health, a job or "unforeseen circumstances" (which still has to be defined).

You get a pro rata share of the $250,000 or $500,000 exemption. If you move after one year, for example, you get half the tax break -- an exclusion of $125,000 for singles and $250,000 for married couples.

It's highly unlikely that your house will appreciate by more than this amount in so short a time, says New York tax expert Sidney Kess.

Almost all home sellers won't owe a dime in tax.

Pub Date: 8/03/98

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