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Impact of Marriage & Divorce on Taxes

Instructor: Morgan Gannarelli
In this lesson, we will discuss the impact of taxes when you get married and the impact of taxes when you divorce. We will also cover the tax implication when dependents are involved.

Marriage & Taxes

Jeff and Tina just got married! They make all of the necessary changes, Tina changes her name on her driver's license, social security card, and tax forms. They both change their tax status to married. Did you know that when you get married, the government actually takes out less taxes from your paycheck? This seems great, right? Well, depending on your taxable income and marginal tax rate, you may end up having to pay taxes at the end of the year because there was not enough money taken out each paycheck. Most newlyweds are unaware of this and end up finding out when they owe the government money for taxes. There are many ways to prevent this from happening. You can have an additional amount withheld from your checks for federal taxes, or you can also select married, but withhold at a single rate, which means they would use the same rate you had before you got married. Either way, it is important to make these changes if you do not want to end up owing money each year for taxes.

Another factor to consider when getting married is that you will need to decide if you are going to file jointly or separately. If you file jointly, both spouses are responsible for what is on the tax return and both spouses must sign the form. The benefit to filing jointly is that you may have lower tax rates on the combined income. Filing separately may be the right choice if Jeff had a business that he owned before he married Tina and she does not want to be affected by Jeff's self employment tax. Tina is used to getting a refund each year and Jeff always owes taxes, so they will need to discuss this and decide which option is best for them.

Benefits

Other than the benefits we mentioned above, there are many tax advantages to being married. There is an unlimited marital deduction that allows for assets to be transferred to the surviving spouse tax free. You get a higher exemption allowance from gift tax. As of 2016, up to $28,000 is excluded from gift tax. Let's say Tina and Jeff decided to give $22,000 as a gift to Jeff's brother who was needing help with a down payment. The entire $22,000 is exempt from gift tax.

It has now been a couple years and Jeff and Tina have one child together. As a married couple, they are able to have a higher threshold and potential to receive the full child tax credit. In 2016, as a married couple filing jointly, the threshold is $110,000. This means that Tina and Jeff can make up to $110,000 (adjusted gross income) and still be able to receive the $1,000 child tax credit. This is compared to a single person who's threshold is $75,000 AGI.

Marriage and divorce impact your taxes
marriage

Divorce

Unfortunately, Tina and Jeff have decided to get a divorce. There are also tax implications with divorce. There are many financial factors that go into a divorce. Not only will Tina and Jeff both have to change their filing status, but they will also have to split their marital assets, there might be alimony or child support involved, and all of these implications will impact their taxes. Even if Jeff was the only one earning money, both spouses are responsible for any taxes due because they were under married, filing jointly status.

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