Tax implications on major life events, like getting married, having children, or buying a home, can significantly impact one’s tax situation. Then divorce and the death of a spouse are also significant life events with various tax implications. This post will inform you of these events’ tax implications, so you can easily navigate the changes and optimize your financial strategies.
Tax Implications on Getting Married and Filing Jointly
When two people get married, their tax situation changes as they can now choose to file jointly or separately. Filing jointly often results in tax savings, allowing couples to combine their incomes and take advantage of a higher standard deduction and lower tax brackets.
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Tax Benefits of Filing Jointly
The tax code encourages married couples to file jointly by offering several benefits, such as:
- Higher Standard Deduction – The standard deduction for married couples filing jointly is higher than the deduction for single individuals or married couples filing separately (Tax Code Section 63(c)(2)).
- Lower Tax Brackets – Married couples filing jointly are taxed at lower rates than individuals or married couples filing separately, resulting in lower overall tax liability (Tax Code Section 1(a)).
- Increased Tax Credits – Some tax credits, such as the Child Tax Credit (Tax Code Section 24) and the Earned Income Tax Credit (Tax Code Section 32), are more generous for joint filers than for single filers or married couples filing separately.
Potential Drawbacks of Filing Jointly
Despite the advantages, there are some potential drawbacks to filing jointly, including:
- Joint Liability – When filing jointly, both spouses are equally responsible for the accuracy of the tax return (Tax Code Section 6013(d)(3)). If one spouse understates income or deductions, both spouses may be liable for additional taxes, interest, and penalties.
- Marriage Penalty – In some cases, especially for couples with similar incomes, filing jointly can result in a higher combined tax liability than if the spouses were to file separately. This phenomenon, known as the “marriage penalty,” can be mitigated through careful tax planning.
Tax Implications of Having Children
Adding a child to your family can also have significant tax implications. Several tax provisions are designed to help families with children offset the costs of raising them.
Child Tax Credit
The Child Tax Credit (CTC) is a valuable tax break for parents. For each qualifying child under 17, the CTC provides a credit of up to $2,000, which can directly reduce your tax liability (Tax Code Section 24). The CTC is also partially refundable. You must provide the child’s Social Security number on your tax return to claim the CTC.
Child and Dependent Care Credit
The Child and Dependent Care Credit (CDCC) is designed to assist working parents with childcare costs for children under 13 or disabled dependents of any age (Tax Code Section 21). The CDCC provides up to 35% of qualifying childcare expenses, with a maximum credit of $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals.
Read our article Child and Dependent Care Credit vs Child Tax Credit
Child Adoption Credit
If you adopt a child, you may be eligible for the Adoption Credit, which can help offset some of the expenses associated with the adoption process (Tax Code Section 23). The maximum credit amount for 2021 was $14,440 per child, subject to income limitations and phaseouts.
Buying a Home and Tax Implications
Purchasing a home can have a significant impact on your taxes. Homeownership offers several tax benefits that can help offset the costs of owning a home.
Mortgage Interest Deduction
One of the homeownership’s most important tax benefits is the mortgage interest deduction (Tax Code Section 163(h)). Under this, homeowners can deduct the interest paid on their mortgage from their taxable income. The mortgage interest deduction is limited to interest paid on mortgage debt up to $750,000 for loans taken out after December 15, 2017.
Property Tax Deduction
Homeowners can also deduct property taxes paid on their primary residence and other real property, such as vacation homes (Tax Code Section 164). However, the deduction for state and local taxes, including property taxes, is limited to $10,000 annually for single and married taxpayers filing jointly.
Home Office Deduction
Using your home exclusively and regularly for business purposes makes you eligible for home office deduction as prescribed under the Tax Code Section 280A. The deduction is facts-based, and you can claim proportionate expenses, such as mortgage interest, property taxes, utilities, and insurance, based on the percentage of your home used for business purposes. Read more on this Home Office Deduction Calculator.
Divorce and Tax Implications
Divorce is indeed a significant life event with various tax implications. When a couple goes through a divorce, their tax filing status, deductions, and credits may be affected. Understanding these changes can help individuals navigate their new financial landscape and minimize tax liabilities.
After a divorce, each individual must change their tax filing status from married to single or, if they have dependents, to the head of the household. This change can impact the tax brackets and standard deductions that apply to their income.
Under the Tax Cuts and Jobs Act of 2017, alimony payments are no longer deductible for the payer or considered income for the recipient for divorce agreements executed after December 31, 2018. For divorce agreements executed before this date, alimony payments remain deductible for the payer and taxable income for the recipient. Read the detailed article – is alimony taxable?
Child Support and Tax Credits
Child support payments received by the parent who has custody of the child for the majority of the year (the custodial parent) can generally claim the Child Tax Credit and other tax benefits related to the child. In some cases, the noncustodial parent can claim these benefits if both parents agree and meet specific criteria outlined in Tax Code Section 152(e).
Death of a Spouse and Tax Implications
The death of a spouse is another significant life event with tax implications. The surviving spouse must navigate changes in filing status, deductions, and potential estate tax issues.
Filing Status and Deductions
When a spouse dies, the surviving spouse can still file a joint tax return for the tax year in which the death occurred, taking advantage of the same tax brackets and standard deductions as if the spouse were still alive (Tax Code Section 6013(a)(3)). In the following years, if the surviving spouse has a dependent child, they may qualify for the “qualifying widow(er)” filing status, which allows them to continue using the same tax brackets and standard deductions as married filing jointly for up to two years after the spouse’s death (Tax Code Section 2(a)).
The death of a spouse may also result in estate tax implications. The federal estate tax applies to estates valued above a specific exemption amount ($11.7 million in 2021, adjusted annually for inflation). Under the concept of “portability,” a surviving spouse can use any unused portion of the deceased spouse’s estate tax exemption, effectively increasing the exemption amount for the surviving spouse’s estate (Tax Code Section 2010(c)). To take advantage of portability, the surviving spouse must file a timely estate tax return (Form 706) for the deceased spouse, even if no estate tax is owed.
Inherited Retirement Accounts
The surviving spouse must also address inherited retirement accounts, such as IRAs and 401(k)s. Generally, a surviving spouse has several options for handling these accounts, including rolling the inherited assets into their retirement accounts, maintaining a separate inherited IRA, or taking distributions. Each option has unique tax implications and should be careful.
As you encounter these life milestones, consider consulting with a tax professional to help you navigate the complexities of the tax code and make the most of your financial opportunities.
While the information on this site - Internal Revenue Code Simplified-is about legal issues, it is not legal advice or legal representation. Because of the rapidly changing nature of the law and our reliance upon outside sources, we make no warranty or guarantee of the accuracy or reliability of information contained herein.