Marriage, divorce, and parenthood – what do these things have in common? They all come with a variety of tax implications. One of the most common events following marriage is the consolidation of assets with your partner. Meanwhile, divorce precipitates the splitting of assets. And giving birth to or adopting a child means finding childcare and increased spending on groceries and other expenses.
Continue reading below for a list of common tax implications that accompany these common life changes, and for further assistance or information in making any of these transitions, consider meeting with a tax preparer, CPA, or a lawyer specializing in marriage or divorce.
Divorce
Division of retirement assets – In the event of a divorce, you can anticipate the split of marital assets. This can include retirement assets like funds from traditional IRAs, Roth IRAs, 401(k)s, 403(b)s and other employer-sponsored plans. In most cases, the portion of the funds in the retirement account that accumulated during the marriage is considered marital property and will likely be split between parties. Any contributions made before or after the marriage are typically not considered marital property. So long as these accounts are rolled over into another account, you typically will not be required to pay taxes on them. However, if the receiving spouse takes a distribution of the funds, they are responsible for paying federal and/or state income taxes on the withdrawal.1
Capital gain taxes – If you’re selling your house and you have a capital gain from the sale of the home that previously served as your primary residence, you may be able to exclude up to $250,000 of that gain from your income. 2 If you’re still filing jointly with your former partner, you may exclude up to $500,000.
Tax return status – If you are still legally married to your partner on the last day of the year, you must file a tax return with the status of married filing jointly. To avoid this issue, consider having your divorce finalized before the final day of the year.3
Dependents/children – If your former spouse gains custody of your children, you should know that child support payments are always tax neutral, meaning they are neither deductible by the parent paying nor taxable income for the parent receiving it. 4 It’s also important to work out who will be claiming your children as dependents on your separate tax returns moving forward. If the noncustodial parent wishes to claim their children as dependents, they must receive a written declaration from the custodial parent to do so.5
Marriage
Changing tax brackets – Marrying your partner means you get to combine your incomes and file a joint tax return at the end of the year. If you earned $250,000 in 2023, you fell into the 35% tax bracket. However, if your partner earned $75,000 and you filed jointly for a combined income of $325,000, you’d actually fall into the 24% tax bracket.6
Purchasing or selling a home – Marriage usually precedes the purchase of a home together or selling one partner’s home to move into the other’s. The tax implications of this should be considered. The same rules apply as selling your house following a divorce – you may exclude up to $250,000 (or $500,000 if filing jointly) of your capital gain from the sale of your former primary residence.
Marriage tax penalty – If you and your partner earn similar incomes, you will suffer from a marriage tax penalty. This occurs when your household’s overall tax bill increases after marrying your partner and filing taxes together. Generally, federal marriage tax penalties are only felt at high-income levels. Some states also have a state tax penalty that should be taken into consideration.7
Parenthood
Child Tax Credit – This Child Tax Credit is partially refundable and gives you $2,000 per qualifying child. In 2023, $1,600 of the $2,000 is refundable, meaning if you owe nothing, you’ll receive up to $1,600 as part of your tax refund.8 Higher income families with a modified adjusted gross income of $400,000 or more may be eligible for a lower Child Tax Credit. This tax credit is claimable each year until your dependent turns 17 years old.
Adoption Credit – If you plan on adopting your child, you may be eligible for another tax credit. The Adoption Credit was worth up to $15,950 per child in the tax year of 2023.9 This tax credit is nonrefundable, meaning the amount you can use is limited to your tax liability for the year. If you only owe $10,000, that’s all you can use of the credit. You can, however, carry forward the unused portion of the credit for up to five years. Those with an income over $279,230 do not qualify for this credit, however.
Child and Dependent Care Credit – This tax credit is claimable if you or your spouse paid for care expenses for a child or dependent while you either worked or looked for work. The amount of this tax credit is a percentage of the total amount you paid in care expenses for your child or dependent and depends on your AGI. The dollar limit may not exceed 20% to 35% of $3,000 for one dependent or $6,000 for two. The care must have been administered to a child under the age of 13, or a dependent/child that was physically or mentally incapable of self-care. This tax credit is nonrefundable, meaning if you owe nothing at the end of the year, you won’t receive funds from this credit.10
529 Savings Plans – A 529 Savings Plan is a tax-advantaged savings account that allows you to make contributions for future education expenses. These contributions are not federally tax deductible but depending on what state you live in, may be deductible on your state’s tax return. However, when the time comes withdrawals from the account must be used on qualifying expenses. Qualifying expenses include but are not limited to (depending on the type of savings account) room and board, tuition, textbooks, and more.11
The opinions contained in this material are those of the author and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reputable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Before investing, the investor should consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Retirement Plans: Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½ , may be subject to an additional 10% IRS tax penalty.
