Estate planning and real estate
Marriage allows you to save on taxes for estate planning purposes, too. While you may need to pay estate taxes if you leave a large sum to family members, you generally aren't taxed when leaving money or real estate to a spouse. Because the government considers money from both individuals of a married couple as the same, you can also give your spouse a large gift without triggering gift taxes. In addition, both spouses can gift large sums of money to the same person, which effectively doubles what you can gift tax-free in a year.
Another great tax benefit for married couples comes into play when selling real estate. If you sell a property for a profit, in many cases you'll get $250,000 in capital gains before owing any taxes Opens in new window. But if you're married and file jointly, you each get $250,000, or $500,000 total, of tax-free capital gains.
How does divorce affect your tax return?
If you divorce, you'll need to file your own tax return. Your return will also change in several other ways.
First, you have to decide if you'll claim single filing status or if you'll file as the head of a household. Filing as the head of a household gives you a higher standard deduction but has some requirements around housing and dependents. If you qualify for this status, it could save you a lot of money.
If you have children with your ex-spouse, you'll have to figure out who will claim them as dependents. For 2020, you can save up to $2,000 per dependent child on your tax return Opens in new window. The legal custodial parent typically gets both head of household status and the child tax credit.
Deductions and credits
If your divorce agreement includes alimony and child support, your tax return may be affected in other ways. For divorces finalized prior to the end of 2018, the payer generally has the ability to deduct alimony but not child support, while the recipient pays income taxes on alimony but not on child support.
If you incur any attorney costs directly related to alimony or the transferring of assets, you may be able to deduct those costs. Beware, however, that transferring assets may increase your taxable income.
Depending on your income after the divorce, your tax bracket may go up or down. It could also mean the difference in qualifying for the earned income tax credit Opens in new window and other deductions or credits.
For divorces finalized after 2018, the payor can no longer deduct the alimony payments and the recipient does not include in income. This may impact negotiations during the divorce proceedings.
Real estate and retirement
Dealing with a home during a divorce can be tricky. If you sell the house and split the assets, each ex-spouse gets the $250,000 capital gain deduction. If one spouse buys out the other, there are usually no taxes due. If you're the one leaving the house, make sure the mortgage is refinanced to remove your name; otherwise, you'll still be legally liable for payments.
In most cases, retirement accounts are considered joint property and usually get divvied up in the divorce proceedings. If you're receiving or liquidating retirement accounts, make sure to keep the money in a comparable retirement account to avoid triggering taxes and penalties on early withdrawals.
Marriage and divorce affect your tax return in many ways. With good planning and preparation, you'll be in the best position to maximize your credits and deductions while minimizing your tax bill.