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Tax Planning for Marriage and Divorce

Tax Planning for Marriage and Divorce

January 09, 2023

What is tax planning for marriage and divorce?

If you're married or considering a divorce, you should be aware of the income tax ramifications of the financial decisions you'll be making. Regarding marriage, you should be knowledgeable about selecting a filing status for tax purposes (and the concept of the marriage penalty). In addition, you should be aware of the concepts of innocent spouse and injured spouse relief. Finally, you might wish to perform a second-income analysis to determine the economic feasibility of both spouses working outside of the home. As for divorce-related tax matters, numerous issues should be considered, including the tax aspects of property settlement, alimony, dependency exemptions, and child support.

Same-sex marriages are now recognized by every state and the federal government. However, for federal tax purposes, marriage does not include registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.

What are some tax issues related to marriage?

If you're married or are contemplating marriage, there are several tax issues to consider, including:

Filing status

Marital status is determined on the last day of the year (December 31 for most individuals). The following rules will apply:

  • Single: You can select single as your filing status if you were unmarried as of the last day of the tax year.
  • Head of household: The rules for qualifying for head of household status vary, depending on whether you are treated as married or single.
  • Married filing jointly: You and your spouse (or former spouse) can choose to file a joint return if you were married to each other through the last day of the tax year, even if you were living apart.
  • Married filing separately: You can select married filing separately as your filing status if you are married or if you are no longer married but had remained married to your former spouse up to and including the last day of the tax year (generally December 31).
  • Qualifying widow(er): You may qualify for this status if your spouse died during the past two tax years, you qualified to file jointly with your spouse in his or her year of death, you have not remarried by the end of the current calendar year, you have a qualifying dependent child, and you provide over half the cost of supporting your child.

Married filing jointly vs. married filing separately

Generally, couples who file married filing separately tend to pay more in total taxes than couples who file married filing jointly. This is because some deductions and tax credits are not available for married taxpayers who file separately. However, in some circumstances, filing separate returns can actually result in a lower combined tax liability. You should figure your tax both on a joint return and on separate returns to be sure you are using the method that results in the least amount of tax.

Married filing jointly vs. single

Would delaying a marriage or accelerating a divorce save you taxes? It might. Sometimes a couple who files as married filing jointly (MFJ) winds up with a tax liability that is greater than it would have been if they were unmarried and filing as single individuals. This is often referred to as the "marriage penalty." The marriage penalty occurs, for example, when the tax code provides a standard deduction for MFJ filers in an amount that is less than twice the amount for single filers, or tax brackets that are wider but not twice as wide as those for single filers.

Whether spouses experience the marriage penalty depends on many factors including the distribution of earnings between them. Spouses who earn relatively equal amounts are more apt to experience the penalty than spouses who earn disproportionate amounts.

On the other hand, some spouses may actually experience the reverse effect.

Innocent spouse relief

If you file a joint return, each spouse is generally jointly and severally liable for 100 percent of the taxes due on the return (as well as for any penalties and interest assessed).

However, you may be entitled to relief from tax liabilities arising from a joint return if:

  • An understatement on a joint return is attributable to erroneous items of your spouse, and you didn't know and had no reason to know of the understatement, and
  • Taking into account all of the facts, it would be inequitable to hold you liable for any portion of a deficiency

Injured spouse claims

In general, debts that you contract before your marriage are construed as separate debt, and debts that you and your spouse contract together during your marriage are considered marital debt. As a general rule, you're not responsible for paying--either during the marriage or after a divorce--the separate debts that your spouse contracted in his or her name alone before your marriage.

However, if you file a joint tax return with your spouse, and your spouse is liable for certain debts, including student loans, taxes, and child support arrearages, the IRS may intercept any refund that might be due for the joint return and may forward such refund to the appropriate federal or state agency. Since it would be inequitable for you to lose your portion of the tax refund simply because your spouse owes money, the IRS allows you to file an injured spouse claim (IRS Form 8379) in certain cases to claim your share of the refund. To be considered an injured spouse, you must not otherwise be required to pay your spouse's past due amount and you must have:

  • Filed a joint tax return
  • Reported income (e.g., wages, interest) on the joint return
  • Made and reported payments (e.g., federal income tax withheld from wages or estimated payments) or claimed the earned income credit or any other refundable credits on the joint return, and
  • Had an overpayment, all or part of which may be applied against the past due amount

Example(s): Beau and his wife, Shirley, filed a joint tax return and expected a $2,000 refund ($1,000 of which was attributable to Beau, and $1,000 of which was attributable to Shirley). Subsequently, they received an IRS letter informing them that the entire $2,000 was to be offset against Beau's defaulted student loan obligation. After filing an injured spouse claim with the IRS, Shirley eventually received her $1,000 tax refund.

Second-income analysis

Another decision facing married couples is whether both spouses should work outside of the home. This decision often arises when a couple has children, or when a retiree collecting Social Security considers a re-entry into the workforce. If you wish to consider whether a second household income is advisable, you need to consider the personal ramifications as well as the financial and tax aspects of your decision. A second-income analysis involves an evaluation of the net benefit derived from a second income, with a particular emphasis on tax aspects.

What are some tax issues related to divorce?

If you're legally separated or divorced, it's important to become familiar with the applicable tax rules regarding a number of topics, including filing status, dependency exemptions, child support, alimony, and property settlement. Also, if either spouse has a pension, it's wise to understand what a qualified domestic relations order is, and how it impacts the division of your retirement plan assets.