A plethora of people living in Kentucky get divorced or married every year. Tax planning becomes significantly more complex when a person undergoes some significant life changes on a personal level, particularly with divorce and marriage.
Comprehending the numerous tax implications associated with such life events is vital for effective financial management. Louisville tax accountant assistance can be valuable in getting a better idea about tax implications and management. In this blog, we are going to have a look at how divorce and marriage impact tax planning.
Divorce and Tax Planning Association
Much like marriage, divorce is another major life event that impacts personally and financially.
Alterations in the Filing Status
Divorce changes the filing status, too, often resulting in higher taxes. As merely a single filer, I lost the benefits of broader tax brackets and higher standard deductions that were earlier available when the filing was done jointly.
If the person has children, the person often qualifies as Head of Household, which allows for a deduction of a higher standard and tax brackets that favor more when put against single filing status.
Division of Marital Assets
The division of marital assets does have some pretty substantial tax implications. Property transfers among the spouses are generally tax-free. However, selling assets like real estate or even investments tends to trigger capital gain taxes in some cases. It is vital to consider the tax basis of those assets received in a divorce to comprehend tax liabilities in the future.
Alimony and Child Support
The tax treatment of alimony underwent significant changes with the TCJ Act of 2017. For divorces completed after 31 December 2018, alimony payments are no longer considered deductible by the concerned payer and are no longer regarded as taxable income for the recipient. However, Child support remains non-taxable for the recipient and non-deductible for the concerned payer.
Marriage and Tax Planning Association
Let’s get started and take a closer look at how marriage impacts tax planning. Marriage changes one’s personal life and also affects one financially.
Filing Status Options
When a person’s marriage status changes, the individual can choose to file separately or jointly with the spouse. If someone opts to file jointly, it results in lowered taxes because of the higher income thresholds and broader tax brackets.
However, certain situations arise where separate filing turns out to be more beneficial overall, such as when one spouse has significant medical expenses or some miscellaneous deductions.
Tax Credits and Deductions Eligibility
Marriage also impacts eligibility for certain tax deductions and credits. For instance, let us consider EITC and CDCC, where the income limits are different for joint filers, making some couples even uneligible. On the other hand, some joint filers qualify for higher phase-out thresholds for certain deductions, like the student loan interest deduction.
Standard Deduction and Tax Brackets
Couples who are married and filing jointly benefit from a higher standard deduction, which is about double that of single filers. Joint filers fall into broader tax brackets, which is advantageous, too, potentially lowering the overall tax rate on the combined income of the two.
For the year 2023, the standard deduction for married people filing together was $27,700, whereas for single filers, it was $13,850.
Wrapping it Up!
People need to have a good understanding of numerous tax implications, especially when someone is going through major life-changing events. It is suggested that we gather enough knowledge about the impact of taxes and what changes need to be made to ensure maximum benefits are attained.
The best possible way to make sure of it is by bringing a tax professional on board who does not merely provide excellent guidance but handles everything related to taxes to let people deal with what is at hand rather than worrying about tax obligations and implications at such crucial instances of life where the person is already under significant pressure.