Life happens. And since taxes are one of the only things that are certain in life, it’s best to know how to prepare and plan for tax changes after major life events. Some of the biggest changes to your taxes come after marriage, the birth of a child, and after a divorce.
How Does Getting Married Affect Your Taxes?
For Federal tax purposes, if you are married at any point during a given year, you are considered “married” for the entire tax year. Once you’re married, you have two filing statuses to choose from: married filing jointly (MFJ) or married filing separately (MFS). The only exception is if one spouse is a nonresident alien, the couple must file separately.
The Differences between Married Filing Separately vs. Jointly
Married Filing Jointly means that the couple can record their respective incomes, exemptions and deductions on the same tax return. The IRS encourages married couples to file jointly by extending several tax breaks to those who do. The joint report combines the income and deductions, and married couples can file jointly even if one spouse has no income or deduction.
When couples file together, the individuals are held jointly liable for the information reported on the tax return. If one spouse brings tax problems from previous years into the marriage, the new spouse should not be affected.
Married Filing Separately means that a couple chooses to record their respective incomes, exemptions and deductions on separate tax returns. Couples may choose to file separately for a handful of reasons. For example, if it’s suspected that one spouse is not honestly reporting his or her income and deductions, then the other spouse may elect to file separately.
However, separate filers are usually excluded from the special tax breaks that joint filers are eligible for, like the Earned Income Credit. If a married couple files separately but has a child together, only one parent can claim the child as a dependent, even if both equally contribute toward child support. If one individual itemizes deductions, the other cannot claim the standard deduction.
Married Filing Jointly or Separately Tax Brackets
The tax bracket for a married couple depends on if the couple chooses to file jointly or separately. When a couple chooses MFJ, their tax bracket depends on the combined income, which may bump one or both individuals into a higher tax bracket. Tax brackets for MFS are the same as tax brackets for those who file as single.
How Do My Taxes Change When I Have A Child?
To claim a child as a dependent, you’ll have to report the child’s Social Security Number on your tax return; if you have multiple children, you’ll have to report the SSN for each one. You can request a Social Security card for your newborn when applying for a birth certificate at the hospital. Failing to report the SSN for each dependent can result in a $50 fine and slow down your refund. So if this is your first time filing taxes with a child, be sure to register for the SSN right away after he or she is born.
For tax years prior to 2018, claiming your child as a dependent would reduce your taxable your income by the annual dependency exemption. In 2017, the tax deduction for a child was $4,050. But starting in 2018, dependency exemptions are replaced with increased child tax credits that directly lower your tax instead of you taxable income.
With the birth of a new baby comes a $2,000 child tax credit, and you will receive it every year until the child turns 17. You’ll receive the full credit no matter when in the year the child was born. The credit will reduce your tax bill dollar for dollar, so the $2,000 child credit will reduce your tax bill by $2,000.
If you are married with a child, you can still choose to file as MFJ or MFS. If you do file separately, only one parent can claim the child as a dependent. Additionally, when a couple chooses married filing separately, the child tax credit goes to the parent claiming the dependent. Single parents can choose to file as head of the household as long as they claim at least one dependent and the dependent lived with the parent for more than half the year.
How Does Divorce Affect Taxes?
Whatever your marital status is on December 31 is what determines your filing status for that tax year. A married couple undergoing the divorce process must still file as MSF or MSJ until the divorce is final. Ex-spouses filing taxes after the divorce is finalized can file as single or head of the household, considering the circumstances.
If the couple has a child, one may claim the dependent if the child lived with the parent for a longer period of time during the year than with the other parent. The parent who claims the child as a dependent can also claim the child credit.
If there are alimony payments involved, the ex-spouse making those payments may take a tax deduction, even if the deductions are not itemized. The IRS will only consider these payments to be true alimony if they are made in cash and are required by a divorce agreement. The ex-spouse receiving alimony must pay income tax on the amounts that are deducted.
For child support, the ex-spouse receiving these payments does not pay income tax nor does the ex-spouse making these payments get a deduction. If you owe child support and file taxes, the IRS will take your tax refund to cover these arrears, and this money will be given to the appropriate child support agency.
Find Professional Help For Filing Your Tax Return
Whether you’re getting married, filing for divorce or expanding your family, these changes will affect how you file your taxes. Watson CPA is here to handle all your tax preparation questions for any stage of life! Request your free consultation now to get in contact with an experienced CPA today.