Tax Planning for Life Events: Marriage, Divorce, Children, and Home Sales
Life events that seem primarily personal — marriage, divorce, the birth of a child, selling a home — can have substantial tax consequences. Understanding these implications before the event (not just during tax filing season) allows for planning that can significantly reduce your tax bill.
Marriage
Getting married changes your filing status and may create a "marriage penalty" or "marriage bonus" depending on both spouses' incomes. When both spouses have similar incomes, the married filing jointly rate schedules can create a higher combined tax than filing as two singles — the marriage penalty. When incomes are very different, the opposite often occurs — a marriage bonus from the lower-earner's income being taxed at the lower combined rates. Review your withholding after marriage using the IRS withholding estimator and file new W-4s with your employers.
Divorce
Alimony for divorces finalized after December 31, 2018 is no longer deductible by the payer or taxable to the recipient — a major change from prior law. Child support is not deductible in any case. The transfer of retirement accounts between spouses in divorce requires a Qualified Domestic Relations Order (QDRO) to avoid triggering taxes and penalties; direct cash transfers from retirement accounts without a QDRO are treated as taxable distributions. Discuss these matters with both a divorce attorney and a tax professional before finalizing the agreement.
Having Children
The birth or adoption of a child brings several tax benefits: the Child Tax Credit ($2,000 per qualifying child under 17, $1,700 refundable in 2024), the Child and Dependent Care Credit for daycare and after-school care costs, the Earned Income Tax Credit for lower to moderate income families, and tax benefits for education savings (529 plans contributions may be deductible at the state level; earnings grow tax-free when used for education). If you adopt, the Adoption Tax Credit covers qualifying adoption expenses up to $16,810 per child in 2024.
Selling Your Home
The home sale exclusion allows married couples filing jointly to exclude up to $500,000 of gain from the sale of a primary residence ($250,000 for singles), provided they have owned and lived in the home as their primary residence for at least two of the five years before the sale. Gains above the exclusion are taxed at long-term capital gains rates. Keep records of the original purchase price plus all capital improvements — these increase your cost basis and reduce your taxable gain.
Contact our tax professionals at MyTaxService.org before or during a major life event to plan effectively, or read our other articles for more tax planning guidance.