Susan Doktor is a journalist and business strategist who hails from New York City. She writes on a wide range of issues including finance, technology, and workplace issues. Follow her on Twitter: @branddoktor
Filing joint taxes
Tax brackets work differently when a joint tax return is filed. Although married tax brackets are not exactly double the income of an individual filing, the income limit is still higher than it would be for an individual. For example, if one spouse makes significantly more than the other, it is entirely possible that the couple would end up having a lower marginal tax rate than an individual who makes as much as their combined income.
● Contributing to an IRA while unemployed
Normally, an unemployed individual is ineligible to make contributions to an IRA (individual retirement account.) However, a married couple filing their taxes jointly can make use of combined income to make contributions to each spouse’s IRA, even if one of them does not currently have a source of income. Additionally, the limit at which tax benefits for IRA contributions are phased out is higher for married couples than for individuals.
● Mix and match benefits
In the event that both spouses have jobs with differing benefits packages, it is possible to combine the best options available to each one in order to maximize tax savings. For example, when one spouse has the option of contributing to a DCFSA (dependent care flexible spending account) to save on child care expenses, the other spouse can choose to cover the family through their employer’s health insurance plan.
● Filing is quicker and potentially less expensive
If you only have to file one tax return, odds are you’ll spend less time preparing it, and you save on the costs of filing twice. Simple, but effective!
Growing the family
Depending on your specific situation, you could be eligible to receive a number of tax credits such as the Child Tax Credit, the American Opportunity Tax Credit, and the Lifetime Learning Credit, among others. In the case of the latter two, while they are applicable for individuals, you are able to claim them for your dependents, as well. Children’s medical expenses can also be applied toward your overall medical deductions, and so can child care expenses under certain circumstances.
Taking out a life insurance policy can also be a good decision taxwise, even though you yourself may not be around to reap the benefits of it. In the event that you have a life insurance policy and you were to pass away, that life insurance payout would be made to your beneficiaries— your spouse and children in this example--completely tax-free.
Though it may be an unpleasant topic to discuss, it’s something to be aware of when considering your family’s financial security in the event that one is unable to be there for them.
If you haven’t yet finalized the divorce, you can still file your taxes separately to make the process of separating your financial affairs easier. In the event that you choose to do this, or if the divorce has already been finalized, arrangements can be made to have one parent claim the child as a dependent while the other receives the dependent care credits, regardless of whether they are considered the custodial parent.
Another detail to keep an eye out for is the process of dividing assets. When assets get divided, the party receiving said asset doesn’t have to pay taxes as a result of that transfer. However, if said asset is sold—say, $70,000 in stocks with a tax basis of $35,000—the receiving party is responsible for paying taxes on the appreciation of the asset—the $35,000 over the tax basis, in this case.
Likewise, when selling what is considered a primary residence, married couples are allowed to not pay taxes on the first $500,000 made from the sale, whereas individuals may only exclude the first $250,000. If you were to sell said residence after a divorce, each party is allowed to exclude up to $250,000, as long as the appropriate requirements are met.
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David B. Younger, Ph.D. is the creator of Love After Kids, for couples that have grown apart since having children. He is a clinical psychologist and couples therapist with a web-based private practice and lives in Austin, Texas with his wife, 16-year-old son, 7-year-old daughter and 8-year-old toy poodle.