Tax Prophet: FAQ Septmeber 1 1996

Frequently Asked Tax Questions -- September 1 1996

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, Sunday September 1, 1996

Spouse's pre-marital debts; California taxes paid by non-residents


Note: This exercise is for educational purposes only and is not intended to be legal or tax advice. Your particular facts and circumstances must be considered when applying the U.S. tax law. You should always consult with a competent tax professional with respect to your particular situation.

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  1. Question: My financé owes federal taxes. After we marry, can the IRS take our community property or my separate property to satisfy my husband's tax liability? Would a prenuptial agreement help?


  2. Question:If I move out of California, will the interest earned on my California bank accounts still be subject to California state taxes? What about the earnings in my IRA and 401 (k) plan? These contributions were made while I lived in California.


  3. An update on the minimum wage bill

  1. Answer to Question #1:

    Your separate property cannot be used to satisfy a pre-martial tax debt, incurred by your new husband. However, since community property is comprised of assets and income acquired by either one or both of you after marriage, the IRS can reach your husband's share of the community property to satisfy its tax debt. This can lead to distressing results. The IRS contends that your salary ( a community property asset) belongs equally to you and your husband; therefore, it can garnish up to 50% of your wages to help satisfy his pre-marital tax debt. California already has a law to prevent creditors from satisfying premarital debts from the earnings of the other spouse, but the IRS claims it is not affected by this state law.

    As part of the recently enacted Taxpayer's Bill of Rights II (subject of the last column), Congress has directed the Treasury to study this and other issues relating to joint return tax liability and to report its findings to the House Ways and Means Committee within six months after the date of enactment.

    In any event, a written "prenuptial" (pre-marriage) agreement retaining the separate property character of wages earn by each spouse during your marriage should protect your earnings from your husband's tax claim. The IRS respects these written agreements. Also, you should consider filing separate tax returns, especially if there will be a tax refund on your salary, otherwise, the IRS might apply the entire refund against your husband's tax liabilities. While you may reclaim your share of the refund, dealing with the IRS bureaucracy on this issue could prove exasperating.


  2. Answer to Question #2:

    As a resident of another state, California can no longer tax you on your bank interest earned within those borders. Purchases and sales of stock through a California broker are also exempt.

    Until recently, California claimed it could tax out-of-state residents on their retirement benefits previously earned when they had worked in California, claiming that since the taxpayer had deducted those contributions and thereby lowered their California income tax in the year of the deduction, it was entitled to tax the income when it was finally received. Effective January 1, 1996, Congress stopped states from taxing the retirement income of former residents.


  3. Update on the minimum wage bill

    The Minimum Wage Bill, recently signed by the President, contained legislation regarding the taxability of non-physical personal injury damage awards. These damages, including emotional distress and discrimination awards, as well as punitive damages awarded in connection with a physical injury, will now be fully taxable. President Clinton has stated that he disagrees with this law and will work to change it. Taxpayers who are negotiating settlements should be requesting larger payments to offset these new adverse tax consequences.



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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**