So, you’ve decided to tie the knot; or, unfortunately, untie it. You may have questions about what that means from an income tax perspective. Here is a summary of the basics.
Marital status is determined as of the last day of the year, and that status applies for the entire year. The exception to this is if your spouse dies during the year, in which case you are still considered married for the year.
If married, your choices of filing status are married filing joint or married filing separate. You cannot file as single if you were married as of the last day of the year.
The vast majority of married couples file jointly. There are multiple reasons for this. It is traditional; only one set of returns has to be filed; you avoid having to figure out how to allocate income, deductions, credits and payments made; and, most importantly, it usually results in a lower combined tax liability than filing separately (especially if one spouse had most of the income).
However, there are reasons to file separately. The spouses may have decided to keep their finances separate; there may be a need to avoid joint and several tax liability (e.g. one spouse may suspect that the other has unreported income or is overstating deductions or one spouse will have a tax liability with insufficient funds to pay); the spouses may be divorcing and prefer to keep everything separate or cannot cooperate sufficiently to file a joint return; or, in some limited situations, filing separate can result in a lower combined tax liability.
Assuming the spouses are amenable to filing either jointly or separately, it is often advisable to run the numbers both ways to see which is most advantageous.
In the case of divorce, for agreements entered into prior to 2019, alimony is deductible by the payor and includible in income by the payee. This is generally advantageous, as the payor is often in a higher marginal tax rate bracket than the payee. For agreements entered into after 2018, however, there is no deduction for alimony paid, and the recipient is not taxed on the alimony received.
Property settlements between divorcing spouses are neither taxable nor deductible, and any inherent gain is not triggered. The recipient spouse takes the same tax basis that the transferor spouse had. This applies also to qualified retirement plan accounts transferred pursuant to a QDRO (qualified domestic relations order).
Child support is neither taxable to the recipient, nor deductible by the payor.
Kenneth H. Bridges, CPA, PFS and Jacquelyn J. Brown, CPA are with Bridges & Dunn-Rankin, LLP, an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.