The tax questions coming from couples facing a divorce & other life-changing events have been on the rise so we thought it would be wise to take a step back & answer some of the most common questions. As always, you can send your tax questions to our network of tax experts if you need personalized tax advice.
Q1. Does a spouse typically have to pay a higher % of taxes if they get divorced & can’t file jointly?
It depends on income levels but generally, yes, the tax rates go up faster at lower income levels when filing single vs. married filing jointly. For instance for single filers, if you are in the $0-$8,375 bracket you are projected to be in the 10% tax bracket for 2010, then it goes to 15% for $8,375-$34,000. For married filing jointly, you are in the 10% bracket from $0-$16,750, then it goes to 15% for $16,750-$68,000.
Q2. If a spouse loses custody of the children, can they still claim them as dependents? If they couldn’t, would taxes go up?
If you don’t have custody of the children, it is unlikely that you would pass the 5 tests that the IRS mandates you satisfy in order to claim a dependent. The 5 tests are – 50% support test, gross income test, member of household, joint return, citizen. Yes, taxes would likely go up.
Q3. If someone quits their job to start day-trading & does quite well, does that typically mean higher taxes due to capital gains?
It really depends on the situation. If you can meet the IRS requirements for being considered a day trader & running a self employed business – there are actually a lot of tax benefits. If you can’t satisfy the “trader” status by the IRS then taxes would be higher. For more information visit the IRS website.
Q4. Do any scenarios come to mind, where a person in their 40s or 50s might be going through a major life transition and inadvertently trigger (or not think about) higher tax implications?
Yes definitely. We’ve had a number of customers ask above taking money out of their 401k/IRA or even how to pay their child’s tuition. If they don’t think through the situation, they can make a very costly mistake (i.e. 10% early withdrawal penalty for an IRA).
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