Families are always in different sizes, but the IRS is very specific as to how makes up a “tax family”. Considering the growing number of unmarried couples co-parenting, it simply means they both can’t lay claim in their children as dependents. Preferably, the couple will choose who gets to claim each child and their benefits. There is usually a way to divide up the children and their tax benefits, thus resulting in a better overall tax outcome for the family.
While Unmarried couples can decide who lay claim on each child, they can’t claim the same child. If peradventure they have more than one child, they can split the children between themselves, but they can’t divide the child tax benefits. A scenario where a couple has three children, one parent can claim all three, or one parent claim two and the other parent claim one.
If the parents are in dispute as to who will claim their children, tax law states that the person with the higher adjusted gross income will claim them.
To be able to ascertain the best outcome, the couple will need to be able to differentiate between the child tax benefits available.
Imagine the situation where one parent earns significantly more than the other. The higher income parent may want to lay claim to using the head of household filing status, to get a standard deduction. Thereby, lowering their taxable income and tax rate. However, the lower income parent may also want to lay claim to the earned income tax credit to get a larger refund.
Instead, if both parents using one filing status, which will limit certain tax benefits, one of the parents will qualify to file as a head of the household. Filing as the household head will increase the parent's standard deduction from $11000-12000 (for single filers) to $17000-18000 and will usually lower their tax rate.
Note to file as head of a household; the parents must pay more than half the total cost of the household expenses and maintenance for a year. Literally what this means is that unmarried couples with a sole source of income, only the parents earning an income or who has streams of revenues will be able to use the head of household status.
Have An Honest Conversation About Your Finances: Cohabiting seems like the latest trend in a relationship lately, but it doesn’t mean you shouldn’t plan for your long term future together and your financial capabilities.
Lovebirds cohabiting together are strongly advised to know the financial stability of their partner. These will help them know how to properly manage their resources.
It is strongly advised that before lovebirds move in, they should know the financial statistics of their partners. They should know if their partners carry lots of credit card debts. Do they budget for their spending it they are spenders? These characteristics are always helpful in knowing your partner financial statistics.
You should know your cohabiters monthly earnings, monthly expenses, not because you want to want to compare and contrast your incomes, but because you need to both need to make decisions as regards your living situation.
Keep An Eye On Your Long-Term Financial Goals: Your relationship might not stand the test of time, but that doesn’t mean you shouldn’t plan for life after the relationship. Expert is of the opinion that uncertainty about cohabiting relationship may be a reason cohabiters fail to invest in non-financial assets such as primary residence, stock, and bonds. They might also be worried as to how they will share these assets should in case the relationship goes south.
Don’t lose your long term financial goals because of the love you shared with your partner. Don’t over spend on interior decorations of the house, don’t plan expensive dates, vacations, all at the detriment of your retirement accounts.
Keep your finances separate. Don't be too blind by love and starting merging your incomes. As the relationship progresses, you can both decide to open a joint account to use in settling your shared expenses which include utility bills, food purchases.
John Pournaras Agency