What effect does marital status have on federal taxes?

A married couple can file a joint tax return in which both spouses report their respective incomes. This may result in a lesser amount of federal income tax being due than if each spouse had filed a separate tax return as single persons (especially if one spouse has a relatively high income in comparison with the income of the other spouse). The opposite may be true for working couples filing jointly; they may pay more income tax than they would have had they filed as single individuals.

Each spouse is prohibited from filing an income tax return as a single person or head of household. The choices available are either a joint income tax return or married filing separately. The income tax filing of married filing separately typically results in the highest level of taxes being paid.

Spousal support paid to a former spouse pursuant to a judgment of dissolution, pursuant to a legal separation agreement or pursuant to a judgment of nullity BEFORE 2019 can be used as a deduction on the payer’s income tax return, with the payment of spousal support being included in the taxable income of the recipient. Payment of spousal support in the absence of a judgment of dissolution of marriage, legal separation or nullity is neither deductible by the payer nor included as income of the recipient (treated as a gift between spouses). Under the 2017 Tax Cuts and Jobs Act, on divorce or separation agreements signed after January 1, 2019, the spouse who pays the alimony will no longer be able to deduct it and the spouse receiving the money no longer has to pick it up as income and pay taxes on it.

A payment to a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all of the following are true:

1. The payment is in cash;
2. The instrument does not designate the payment as not alimony;
3. The spouses are not members of the same household when the payments are made;
4. There is no liability to make any payment after the death of the recipient spouse;
5. The payment is not treated as child support (This is the case if the payment is reduced either on the happening of a contingency relating to your child, or at a time that can be clearly associated with the contingency).

If the payment is alimony, it is deductible by the payer and it is income to the recipient. (Starting in 2019, alimony payments are not deductible by the payer nor count as taxable income to the recipient.) If payments are labeled as “family support,” and no specific sum or percentage is specifically designated as child support, the entire payment is taxed as alimony. If the payment is not alimony, it is neither deductible by the payer nor is it included in the income of the recipient.

Transfers of property to a spouse or a former spouse incident to a divorce does not generally result in taxable income to the recipient, and spouses can make unlimited gifts to his/her respective spouse during lifetime without incurring any gift tax. In addition, spouses are able to leave money and property to the surviving spouse without incurring any estate tax (although there may be an estate tax payable upon the death of the surviving spouse).

Case Studies: The Impact of Marital Status on Federal Taxes

Case Study 1: Joint Filing and Tax Savings

John and Mary, a married couple, filed a joint tax return. With John’s higher income and Mary’s lower income, they were able to take advantage of lower tax rates and deductions, resulting in significant tax savings compared to filing separately.

Case Study 2: Tax Liability of Married Filing Separately

David and Sarah decided to file their taxes separately after getting married. However, they discovered that filing as married filing separately led to higher taxes for both of them. Their combined tax liability was much higher than what they would have paid if they had filed jointly.

Case Study 3: Deductibility of Alimony Payments

Mark and Lisa divorced in 2018. Mark was required to pay alimony to Lisa as part of their divorce settlement. As per the previous tax laws, Mark was able to deduct the alimony payments from his taxable income, while Lisa had to include the payments as taxable income. This provided some tax relief for Mark and resulted in higher taxes for Lisa.

Case Study 4: Changes in Alimony Tax Treatment

Chris and Emily divorced in 2020. The new tax laws implemented by the 2017 Tax Cuts and Jobs Act affected the tax treatment of alimony payments. As a result, Chris could no longer deduct the alimony payments, and Emily didn’t have to include them as taxable income. This change had financial implications for both parties, reducing the tax benefits previously associated with alimony payments.