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Financial rules for stay-at-home spouses

IRAs became available decades ago to help workers build tax-advantaged retirement savings, and so-called spousal IRAs are intended to provide homemakers who may not earn any outside income to be able to create their own personal IRAs, just like paycheck-earning workers.

As with other IRAs, in 2013 homemakers can contribute up to $5,500 annually -- $6,500 if the homemaker is over age 50 -- and the contributions can be deducted from the couple's adjusted gross income, with some restrictions.

It's critically important for nonworking spouses to have funds in their own names, Hounsell says. "No one thinks they are going to get divorced." But when it happens, many former spouses discover they have no access to retirement funds or that they have inadequate retirement funds.

Maximizing Social Security

Homemakers who don't earn an income for a prolonged period and then divorce will probably suffer in retirement because their own Social Security payout would be based on their interrupted and presumably low earnings history.

If you divorce after you reach your 10th anniversary, you'll have a richer retirement. Social Security rules dictate that if a prior marriage lasted at least 10 years, the divorced spouse is entitled to a benefit of 50 percent of the ex's benefits.

For instance, if a man files for Social Security at age 66 and receives a $2,000 benefit, his former wife could get $1,000 as long as the couple saw a 10th wedding anniversary. Divorced widows also are eligible to collect the spousal benefit if they were married 10 years, says Jim Blair, a former Social Security administrator who co-runs Premier Social Security Consulting.

"If you are married nine years and 11 months, you would get nothing," Blair says.

Filing tax returns

If your spouse cheats on income taxes, you may not be liable if you prove your innocence. A homemaker who earns no income does not have to file his or her own separate income tax return but usually elects to file a joint return with the paycheck-earning spouse, says Paul Kohlhoff, law professor and supervising faculty attorney of the tax clinic at Valparaiso University Law School in Indiana.

The fact that a nonearning spouse jointly files will probably enhance the chances of getting "innocent spouse" relief in cases where the Internal Revenue Service is collecting on a fraudulent return, so long as the nonearning spouse was not aware of the fraud, Kohlhoff says.

The IRS originally came up with an "innocent spouse" rule to provide relief to a spouse who files jointly but was compelled by duress or lack of knowledge to sign off on a return that understated income or underpaid the amount owed, Kohlhoff says.

It's easier for nonworking spouses to be granted this relief since the IRS could argue "there was tacit consent," if a working partner signed a joint return when she or he could file separately, Kohlhoff says.

Usually, a spouse is divorced or separated when he or she asks for relief from having to pay the amount owed. The IRS recently liberalized the rules, eliminating a two-year deadline from the time of the first collection for petitioning for relief. Still, nonworking spouses must prove that they were under physical or emotional duress or ignorant of the tax cheating to be granted this relief, Kohlhoff says.


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