Did you change your Facebook status last year? Millions did! In fact, some 43,869,800 individuals changed their relationship status to “Single.” Another 3,025,791 changed their status to “It’s complicated.” And while 28,460,516 switched to “In a relationship,” a large proportion either got engaged or got married — 5,974,574 and 36,774,801, respectively.
A new status often means new tax implications (and strategies).
Take a look:
Did you Change your Status to Single?
While breaking up with a boyfriend/girlfriend is easy relative to going through divorce, annulment, or legal separation (Just donate his/her stuff to charity and call it a day!), don’t make the situation worse by ignoring important tax considerations. Among them: property settlements, alimony (It’s fully taxable as income to the recipient and provides an “above the line” deduction for the payer); and kids. Who get the tax benefits and exemptions as it pertains to them? Generally, the custodial parent does, but check your divorce decree to see if it specifies otherwise. As for filing status, many divorced people file as Single. However, if you are divorced and at least one of your kids lives with you, you are a custodial parent and will most likely be able to file as Head of Household. That’s a good thing – HOH status generally results in a much lower tax bill. Separated? You can file as Married Filing Separately or Married Filing Jointly, but filing jointly is typically the most beneficial status (see below).
Did you Change your Status to Married?
If you exchanged “I Do’s” anytime in 2010–even if you got married just seconds before the ball dropped on New Year’s Eve–you will be considered legally married for the full tax year. One of the first things you need to do – in addition to contacting the Social Security Administration if you changed your name – is change your filing status. You can either file as married filing jointly or married filing separately. In some situations, you can even file as head of household, but you cannot file as single. What’s typically the best way to go? Married filing jointly. It provides the lowest tax liability and the highest standard deduction. Yes, there are some situations where it might be advantageous to file separately – for example, if one taxpayer has high medical expenses and very little income, or if you suspect your spouse is involved in fraudulent behavior – know that when you file separately you lose valuable credits and deductions, from education benefits to student loan interest deductions and more.
Did you change your status to Engaged?
As you prepare for this next chapter in your life, don’t let the excitement and joy of it all prevent you from having a conversation about your financial future. Before you walk down the aisle, know where your soon-to-be spouse would like to be in 5, 10 years, what assets/liabilities they have (Does he/she owe back taxes? Child support from a former marriage? Has he/she defaulted on student loans?), how you’re going to tackle any existing debt, whether you’re going to keep your finances and investments separate or combine them, how you will handle daily spending decisions, and who will be responsible for paying the bills and preparing the taxes. At this time, you’ll also need to think about changing your withholding.
Did you change your status to In a Relationship?
Not all those in a relationship cohabitate, but for those who do, there are some tax implications. No doubt, there are more couples living together these days–7.5 million opposite-sex couples in 2010, according to the US Census Bureau. That’s 13% more than in 2009. While some heterosexual couples living together can enjoy the rights of marriage without getting hitched the traditional way by claiming common law marriage (recognized by law in over a dozen states), most unmarried couples—especially same sex couples–are up against numerous financial hurdles compared with their married peers. From who gets the homebuyer credit to who claims the kids to health insurance coverage (The IRS doesn’t recognize domestic partners–That means benefits provided for your partner are treated as taxable income) to how you should structure purchases to maximize tax advantages, there are many issues to consider.
Did you change your status to It’s Complicated?
I’ll be honest… I’m not entirely sure what “It’s Complicated” means! If you changed your status to this option in 2010, chances are your taxes are the least of your worries.