Life throws us curveballs, and sometimes those curveballs land right in the middle of tax season. Marriage, divorce, separation, and the death of a spouse are all significant events that can impact your tax filing. This article will guide you through the tax implications of these major life changes, helping you avoid surprises come April 15th.
When Paths Diverge: Taxes After Separation
Separation is a stressful time, and tax filing shouldn’t add to that stress. As a separated couple, you have two filing options: joint or separate.
- Joint Filing: While still married, you can file jointly. This often results in a lower tax bill, but there’s a catch: joint and several liability. This means both spouses are responsible for the entire tax debt on the return, even if one spouse earned all the income. If you’re considering divorce, this could be risky.
- Separate Filing: You can each file a separate return. This avoids joint liability, but it may also mean missing out on tax benefits available to married couples filing jointly. Additionally, if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), your income may be split according to state law, making separate filing more complex.
Head of Household: A Potential Tax Break
If you have a dependent child, you might qualify to file as “head of household” (HH). This status often comes with lower tax rates than single filers. To qualify, you must be unmarried at the end of the year, have paid more than half the cost of maintaining a household for your dependent, and your dependent must have lived with you for more than half the year.
Who Gets the Child Tax Benefits?
During separation, claiming children on your tax return can be a point of contention. Generally, the custodial parent (the one with the child for more than half the year) gets to claim the child and the associated tax benefits. However, this can be changed through a written agreement.
Alimony: A Payment with Tax Implications
Alimony, spousal support payments, used to be tax-deductible for the payer and taxable income for the receiver. However, for alimony agreements signed after December 31, 2018, this is no longer the case. Neither spouse gets a tax benefit from alimony payments under these newer agreements.
Divorce Finalized: Taxes After the Split
Once divorced, your tax situation becomes clearer. Each person files based on their own income and the terms of the divorce decree, particularly regarding child custody, spousal support, and property division.
- Filing Status: As a single taxpayer, you can file as “single” or “head of household” if you qualify based on having a dependent child.
- Children: The divorce decree typically specifies the custodial parent who gets to claim the child on their tax return. However, this can be changed through a written agreement using Form 8332 from the IRS.
- Shared Custody: If you have joint custody, the parent with the child for more than half the year gets to claim the dependency. The IRS uses the number of nights spent in each home to determine who has the child more.
Newlyweds: Tax Considerations for Married Couples
Congratulations on your marriage! When you tie the knot, your tax situation changes too. As a married couple, you have two filing options:
- Joint Filing: In most cases, this is the best option, offering lower tax rates and more tax breaks. You’ll combine your income, deductions, and credits for a single return.
- Married Filing Separately: This option comes with limitations and is generally not recommended unless there are specific financial reasons for it.
Combining Finances: Potential Tax Hurdles
While filing jointly often offers tax benefits, there can be downsides. Combining incomes may push you into a higher tax bracket, limiting some deductions and credits. Additionally, if one spouse receives health insurance subsidies through the Affordable Care Act, their combined income may disqualify them from those subsidies.
When a Spouse Passes Away: Taxes for Widows and Widowers
The year a spouse passes away, you can still file a joint tax return. This can be beneficial because you’ll use the more favorable joint tax rates. Even better, for up to two years after the death of a spouse, you can continue to use the joint tax rates as long as you haven’t remarried and have a dependent child living with you. This provides some tax relief during a difficult time.
Conclusion
Life changes can be complex, and tax implications are just one aspect to consider. If you’re facing any of the situations discussed here, consult with a tax professional to ensure you’re filing correctly and taking advantage of all the tax benefits available to you. They can help you navigate the intricacies of your specific situation and make the most of your tax return. Remember, a little planning can save you a lot of money come tax time!
