4/7/2008

Marriage, Divorce, and Taxes

A change in your marital status has a big effect on your life — not the least of which is the way it changes your finances. When you get married or divorced, you’ll have to face a host of associated tax issues.

Marriage
Your wedding day may be the happiest day of your life, but understand that marriage is also an economic partnership, especially in Uncle Sam’s eyes. The tax issues involved are a lot less complicated than those for divorce, but there are still some traps that might snare you if you’re not careful. Don’t forget about:

• The marriage penalty: In many cases, if both spouses work, the couple will pay more in taxes than would two single people with the same incomes. Tax-law changes have begun to address this inequity, but it hasn’t completely been extinguished.
• Withholding adjustments: Because of the marriage penalty, you must check your withholding status immediately. Many newlyweds, accustomed to refunds when they were single, have found themselves in hot water on April 15 of the year following their marriage, when they owe a ton more in taxes than they had expected. It’s all due to the filing status, the law, and the amount of withholding from both spouses’ paychecks.

Divorce
A divorce, in turn, could be one of the saddest events of your life. But just as a marriage is an economic union, a divorce is tantamount to an economic divestiture.

Tax issues here include:

• Filing status: Your filing status will change, obviously, and you’ll want to make sure that your withholding follows that new status.
• Other income or deductions: With splitting marital assets, your other income (such as interest and dividends) will change dramatically.

  Likewise, any mortgage interest might be divided or eliminated completely. Other assets, such as rental properties, will also be divided, and the tax impact will follow the person who retains the property.

  There may also be some forced sales of assets that could generate capital gains.

• Timing and character of filing: Remember that your filing status is based on the last day of the year. If you’re still legally married on Dec. 31, you have the option of filing a married-joint return. But if you’re single as of Dec. 31, you are no longer allowed to file a joint return, and some planning is in order.

  Meanwhile, if you’ve been living apart and young children are in the picture, one or both spouses can claim head-of-household status.

• Alimony and child support: Alimony is generally taxable to the person receiving it and deductible by the person paying it.

  But child support is not taxable to the spouse (or children) receiving the payments, and it’s not deductible by the person making the payments. This fact alone will have a substantial impact on your tax and financial life, not to mention how your divorce agreement is negotiated.

Like any other major life event, getting married or divorced will probably have a major impact on your taxes. Even if your life isn’t changing, the tax laws are. It’s up to you to be vigilant so you can keep as much of your money as possible.