Tax Implications of Major Life Events: Marriage, Divorce, and Having Children

Life's significant milestones often come with various emotions and experiences - and a slew of tax implications. Understanding how these events affect your taxes can lead to significant savings and prevent any unwelcome surprises.

Let’s explore how marriage, divorce, and having children influence your tax situation.
 

Marriage

Filing Status Options

Married couples may file their taxes jointly or separately. While there are benefits to filing separately, in most cases, filing jointly is the more advantageous option.

Tax Benefits of Marriage

Marriage comes with several tax perks, including a higher standard deduction and more favorable tax brackets. In 2023, married couples filing jointly will benefit from a significantly higher standard deduction compared to single filers.

Filing jointly will effectively reduce a married couple’s taxable income, potentially providing them with greater tax savings.

Combining Incomes and Deductions When Filing Jointly

Filing your taxes jointly with your spouse means you combine both of your incomes and can combine deductions as well. This option is highly beneficial, especially if one spouse has incurred substantial medical expenses or made significant charitable contributions.

By filing jointly, you may be eligible for a larger deduction than if you were to file separately, potentially resulting in a lower tax bill. Filing jointly can also provide access to certain tax credits and deductions that may not be available when filing separately.

Additionally, it's important to note that both spouses are equally responsible for an accurate the tax return and any taxes owed, so it's important to review all financial information carefully before filing jointly.
 

Divorce

Filing Status After Divorce

Your marital status as of December 31st determines your filing status for the entire year. After a divorce, most individuals will file as single, but some may qualify for the head of household status.

This status offers a higher standard deduction and more favorable tax rates.

Determining the Custodial Parent for Claiming Dependents

For tax purposes, only the custodial parent has the right to claim the child as a dependent unless both parents have agreed otherwise. The custodial parent refers to the one with whom the child has spent the majority of nights during the year.

Tax Treatment of Alimony/Spousal Support Payments

After December 31, 2018, significant changes were made to the tax treatment of alimony payments. As a result of these changes, alimony payments made after this date are no longer tax-deductible for the payer, and the recipient does not need to include them as taxable income. 

This change is a substantial shift from the previous tax regulations and has important implications for individuals involved in divorce proceedings, impacting their financial planning and tax obligations.

Dividing Assets and Retirement Accounts (QDROs)

A Qualified Domestic Relations Order (QDRO) is essential when dividing retirement accounts to ensure tax-advantaged transfers and avoid early withdrawal penalties.

Deductibility of Legal Fees Related to Divorce

Legal fees specifically allocated to alimony or child support determination might not be deductible. However, tax advice related to divorce can sometimes be deducted. Consulting with a tax professional is advised to navigate these specifics.
 

Having Children

Child Tax Credit Eligibility and Amounts

The child tax credit provides significant relief to families, with the credit amount per qualifying child dependent on income thresholds. It’s designed to help offset the cost of raising children.

Claiming Dependents and Tiebreaker Rules for Divorced Parents

In cases of joint custody, various tiebreaker rules come into play to determine which parent can claim the child as a dependent, often based on who has the higher adjusted gross income.

Child and Dependent Care Tax Credit

Families can claim this credit for expenses related to child care (for children under 13) enabling the parents to work or actively look for work.

Education Tax Credits

The American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) provide tax savings for individuals undergoing post-secondary education, covering a range of expenses including tuition, fees, and course materials.

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Going through big life events can bring about not just personal and emotional changes, but also adjustments in your tax responsibilities and benefits. Understanding the tax implications of these milestones can help you financially and make sure you're following the latest tax rules. 

A consult with a tax professional can offer personalized guidance tailored to your specific situation.