Life Events & Taxes
2026 U.S. Rules — Marriage · Home · Children · Inheritance

Filing Status — December 31 Rule

Taxpayers who are married on December 31 are considered married for the entire tax year. A couple married on December 31, 2026, can file Married Filing Jointly for all of 2026 — even if they were single for 364 days of the year.

MFJ vs. MFS — When to Consider Filing Separately

Marriage Penalty — High-Income Couples

When two high earners marry, their combined income can trigger taxes neither paid as singles: the 37% bracket begins at $640,600 (single) but $768,700 (MFJ) — MFJ bracket is not simply doubled. Two singles each earning $500,000 pay 35% on income from $256,226–$500,000; as a married couple, they pay 37% on income above $768,700. Additionally, the combined MAGI may now exceed the NIIT threshold ($250,000) or IRMAA tier boundaries.

Immediate Action After Marriage

• File new Form W-4 with both employers — change withholding to reflect new MFJ status and combined income
• Review 401(k) contribution levels — may need to increase pre-tax contributions to manage new MAGI thresholds
• Update IRA beneficiary designations on all retirement accounts
• Confirm Social Security earnings records are consistent — name change requires SSA update

Filing Status — Year of Divorce

If divorce is final by December 31 of the tax year, the parties cannot file jointly for that year. The options are Single or, for the custodial parent, Head of Household — which provides a higher standard deduction ($24,150) and more favorable brackets.

Alimony — Tax Treatment by Agreement Date

Post-2018 alimony agreements are treated similarly to child support — no deduction and no income. Modifying a pre-2019 agreement after 2018 does not automatically change the tax treatment; it depends on whether the modification expressly adopts post-2018 rules.

Child-Related Rules in Divorce

• Child support: Non-taxable to the recipient; non-deductible to the payer. Payments are considered support obligations, not income transfers.
• Dependency claim: Generally goes to the custodial parent (the parent with the child for more nights during the year). The custodial parent can release the claim to the non-custodial parent using Form 8332 — allowing the non-custodial parent to claim the CTC and dependency exemption in specified years. This release must be attached to the claiming parent's return each year.
• Head of Household: Only the custodial parent can claim HOH status — even if Form 8332 transfers the dependency claim to the other parent. HOH filing status and the dependency exemption can be split between parents.
• EIC (Earned Income Credit): Can only be claimed by the custodial parent — it cannot be transferred via Form 8332. Unlike the CTC, the EIC follows the custodial parent.

Property Division — Non-Taxable Transfer

• Transfers of property between spouses incident to divorce are non-taxable under IRC §1041. The recipient spouse takes the transferor's original basis — no gain or loss at the time of transfer. When the recipient later sells the property, the gain is measured from the original basis.
• Planning implication: Equal FMV property transfers in divorce can have very different after-tax values if the properties have different cost bases. A $500,000 house with a $400,000 basis is worth less after-tax than a $500,000 brokerage account with a $490,000 basis.

Retirement Account Division — QDRO Required

• Dividing a 401(k), pension, or similar qualified plan in divorce requires a Qualified Domestic Relations Order (QDRO) — a court order that directs the plan administrator to transfer a specified amount to the alternate payee (the non-employee spouse). Without a QDRO, the distribution is fully taxable to the plan participant, not the recipient.
• IRAs do not require a QDRO — they require a direct trustee-to-trustee transfer per the divorce decree. If the IRA owner withdraws and gives the funds to the ex-spouse rather than doing a direct transfer, the withdrawal is taxable to the IRA owner.

2026 Credits for Dependent Children

Qualifying Child — IRS Rules

• Relationship: Son, daughter, stepchild, foster child, sibling, or descendant of any of these.
• Age: Under 19 at end of year, or under 24 if full-time student, or any age if permanently disabled.
• Residency: Must live with the taxpayer for more than half the year.
• Support: The child must not have provided more than half of their own support for the year.
• Joint return test: The child cannot have filed a joint return with a spouse (unless filed only to claim a refund).

Head of Household — Single Parent Benefit

An unmarried taxpayer who pays more than half the cost of maintaining a home for a qualifying child for more than half the year qualifies as Head of Household — receiving a $24,150 standard deduction (vs. $16,100 single) and more favorable brackets. This is one of the most valuable and most commonly missed filing status elections.

Mortgage Interest Deduction — 2026 OBBBA Rules

• Post-December 15, 2017 mortgages: Mortgage interest deductible on the first $750,000 of acquisition debt ($375,000 MFS). OBBBA permanent.
• Pre-December 16, 2017 mortgages (grandfathered): Mortgage interest deductible on the first $1,000,000 of acquisition debt. The grandfathered limit applies as long as the original loan remains outstanding — refinancing generally preserves the grandfathered status up to the outstanding balance at the time of refinance.
• Home equity loan interest: Deductible only when proceeds are used to buy, build, or substantially improve the home securing the loan. Home equity debt used for personal purposes (car purchase, vacation, debt consolidation) generates non-deductible interest under current law.
• SALT cap on property taxes: Property taxes are deductible, but the combined SALT deduction (state income tax + property tax) is capped at $40,400 in 2026 (up from the prior TCJA $10,000 cap, returning to $10,000 in 2030).

Home Sale Exclusion — §121

Homeowners who sell their primary residence may exclude up to $250,000 (single) / $500,000 (MFJ) of capital gain from federal income tax under IRC §121. This exclusion is not indexed for inflation — the same amounts have been in place since 1997.

• Ownership test: The taxpayer must have owned the home for at least 24 months (2 years) out of the 5 years ending on the sale date.
• Use test: The taxpayer must have used the home as their principal residence for at least 24 months out of the 5 years ending on the sale date. The ownership and use periods do not need to overlap — they can be different 2-year periods within the 5-year window.
• Frequency limit: The exclusion can be used only once every 24 months. It cannot be claimed if the exclusion was used for another home sold within the prior 2 years.
• Gain above exclusion: Any gain exceeding the exclusion amount is taxed at long-term capital gains rates (0%, 15%, or 20%) if the home was held more than 12 months, plus 3.8% NIIT if MAGI exceeds $200,000 (single) / $250,000 (MFJ).
• Home office recapture: If the home office deduction was claimed using the actual expense method (not the simplified $5/sq ft method), the depreciation claimed on the home office portion must be recaptured as ordinary income at sale — regardless of the §121 exclusion.

Tracking Basis — Additions to Cost Basis

• The cost basis of a home is not just the original purchase price. Basis increases with capital improvements: additions, new roof, HVAC replacement, kitchen renovation, landscaping (permanent). Basis does not increase with repairs that maintain current condition (painting, fixing a leak, replacing broken appliances).
• Maintain records of all capital improvements throughout ownership — receipts, contractor invoices, permits. These records are needed years or decades later to calculate the gain at sale and document whether the §121 exclusion applies to the full amount.

Residency and Domicile — Key Distinction

• Domicile is the state the taxpayer considers their permanent home — the place they intend to return after any absence. A taxpayer can have only one domicile at a time. Domicile determines which state has the primary right to tax worldwide income.
• Statutory residency is a separate concept: maintaining a permanent place of abode in a state and spending more than a specified number of days there (typically 183 days in New York). A taxpayer can be a statutory resident of a state without being domiciled there — and can owe that state's income tax as a resident.
• High-tax state audits: California (FTB), New York, and New Jersey actively audit domicile changes. Taxpayers moving from these states must document the change with specific intent evidence: new driver's license, voter registration, bank accounts, church/synagogue membership, primary physician change, location of valuable personal property, and where the family spends time.

Part-Year Returns and Income Sourcing

• When moving mid-year, both the state of origin and the new state will typically require part-year resident returns. Each state taxes income earned while the taxpayer was a resident of that state (for wage income) or sourced from that state's activities (for investment and business income).
• W-2 wages are generally sourced to the state where the work is physically performed — not the state of residence. Remote workers who move states mid-year should confirm with employers how payroll tax withholding is being allocated.
• Investment income (dividends, capital gains, interest) is generally taxed by the state of domicile for the period it was earned — it is not sourced to the state of origin after a move.

States with No Income Tax — 2026

Alaska, Florida, Nevada, New Hampshire (dividends/interest only), South Dakota, Tennessee (dividends/interest only), Texas, Washington (capital gains tax enacted in 2022), Wyoming. Moving to one of these states eliminates state income tax on wages — but sourcing rules may still subject some income to the prior state's taxation for the part of the year before the move.

Education Tax Credits — 2026

529 Plans — Tax-Advantaged Education Savings

• Contributions are not federally deductible(many states provide a state income tax deduction for in-state 529 contributions — see individual state rules). Earnings grow tax-deferred; qualified withdrawals (tuition, fees, books, room and board, K-12 up to $10,000/year) are tax-free federally.
• Non-qualified withdrawals: Earnings portion subject to income tax plus a 10% penalty. Basis (contributed amounts) can always be withdrawn without tax or penalty.
• Superfunding / 5-year election: A single contributor can make a lump-sum 529 contribution of up to $95,000($190,000 per couple) per beneficiary, electing to treat it as if spread over 5 years for gift tax purposes. No additional annual exclusion gifts can be made to the same beneficiary during the 5-year period. The contributor must file Form 709 to make the election.

529 to Roth IRA Rollover — SECURE 2.0

2026 Estate and Gift Tax — OBBBA Numbers

Inheritance — Tax Treatment for Recipients

• Inheritance is not income: Assets received by inheritance are generally not taxable income to the recipient — no income tax on the value received. This applies to cash, securities, real estate, and most other assets.
• Step-up in basis: The recipient's cost basis in inherited assets is the FMV at the decedent's date of death — not the original purchase price. An inherited stock position purchased by the decedent for $10,000 and worth $200,000 at death: the recipient's basis is $200,000. Selling immediately produces zero capital gain.
• IRAs and 401(k)s are different — no step-up: Inherited retirement accounts do not receive a step-up in basis. All distributions from inherited Traditional IRAs and 401(k)s are fully taxable as ordinary income. For most non-spouse beneficiaries, the SECURE Act requires full distribution within 10 years of the original owner's death — creating a 10-year window to manage the tax cost of the distributions.
• Income in Respect of a Decedent (IRD): Income that the decedent had a right to receive but had not yet received at death — including IRA balances, accrued salary, unpaid bond interest — is taxed as ordinary income when the beneficiary receives it. IRD receives no step-up in basis.

State Inheritance and Estate Taxes

Several states impose their own estate or inheritance taxes with much lower exemptions than the federal $15M threshold. Notable examples: Oregon and Massachusetts have $1M exemptions; Maryland imposes both estate and inheritance tax; Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania have inheritance taxes. Beneficiaries receiving assets from estates in these states may owe state-level tax even if no federal estate tax is owed.

Medical Expense Deduction — 7.5% AGI Floor

• Unreimbursed medical expenses are deductible as an itemized deduction on Schedule A to the extent they exceed 7.5% of AGI. This threshold is permanent under OBBBA.
• Qualifying expenses: physician fees, hospital care, prescription drugs, dental and vision, long-term care insurance premiums (age-based limits), health insurance premiums not deducted elsewhere, medical transportation, and medically necessary equipment.
• Not deductible: Cosmetic surgery (unless to treat a deformity from injury or disease), general health vitamins and supplements (without prescription), gym memberships, and expenses reimbursed by insurance or HSA.
• Bunching strategy: If annual medical expenses are near but below the 7.5% threshold, concentrate elective procedures, dental work, and vision care into a single year to exceed the threshold — then take the standard deduction in alternate years.

HSA — Health Savings Account

Long-Term Care Insurance Premiums — Age-Based Deduction

Disability and Social Security Benefits

• Disability pay: Employer-paid disability insurance benefits are generally taxable. If the employee paid the premiums with after-tax dollars, benefits received are tax-free.
• Social Security disability (SSDI): Taxability follows the same rules as regular Social Security — up to 85% is taxable when combined income (AGI + nontaxable interest + 50% of SS benefits) exceeds $34,000 (single) / $44,000 (MFJ).

Immediate Tax Actions After a Job Change

• File new Form W-4 with the new employer — withholding should reflect the combined income from both the old and new position in the same year (multiple W-2s can under-withhold)
• Confirm FICA withholding totals across both employers — Social Security tax is capped at $184,500 (2026); if total wages from two employers exceed this, excess SS withheld is refunded on the tax return
• Evaluate 401(k) rollover options from the prior employer's plan
• Confirm new employer's 401(k) match structure and begin contributions promptly — missed employer match is a permanent loss of compensation

401(k) Rollover Options at Job Separation

Severance, Signing Bonuses, and RSU Vesting

• Severance pay: Fully taxable as ordinary income in the year received. Withheld at the supplemental wage rate (22% flat federal withholding on amounts up to $1,000,000) — but actual tax may be higher if the combined income for the year pushes into a higher bracket. Adjust estimated tax if severance is not fully covered by withholding.
• Signing bonuses: Taxable as ordinary income in the year received. If a signing bonus must be repaid upon early departure, the repayment is generally deductible as a miscellaneous expense — but note that miscellaneous itemized deductions are permanently eliminated under OBBBA. For repayments over $3,000, IRC §1341 (claim of right) may provide relief.
• RSU vesting: When RSUs vest, the FMV of the shares on the vesting date is ordinary income — withheld and reported on the W-2. The subsequent sale of the shares generates capital gain or loss measured from the FMV on the vesting date (which becomes the cost basis). RSUs do not qualify for capital gains treatment on the spread between grant price and vesting value; only post-vesting appreciation qualifies as LTCG.

Unemployment Compensation

Unemployment compensation is fully taxable as ordinary income — reported on Form 1099-G. State and federal unemployment benefits are both included in gross income. Taxpayers can request voluntary withholding from unemployment payments (Form W-4V) or make quarterly estimated tax payments to avoid underpayment penalties.