Marriage brings about some of the biggest changes in two peoples lives- once separate units, they are now operating in all things as partners- a team- and taxes are no exception. There are some things you’ll want to be aware of when filing your tax return if you have recently been wed.
The Basics of Married Filing
When you marry, the IRS allows you to change your filing status to either “Married Filing Jointly” (MFJ) or “Married Filing Separately” (MFS).
Filing jointly means you and your spouse submit one tax return, combining your incomes, deductions, and credits. This status often results in lower tax rates than if you were single or filing separately, and it allows access to various tax benefits. For instance, the standard deduction for married couples filing jointly is significantly higher than for single filers, effectively lowering your taxable income. Moreover, spouses filing together can earn more before moving into a higher tax bracket, potentially resulting in substantial tax savings.
Conversely, the “Married Filing Separately” status, while less beneficial in terms of tax savings, may be advantageous in specific situations. For example, if one spouse has significant medical expenses or miscellaneous deductions, filing separately might yield a greater tax benefit. However, choosing this option comes with limitations. Certain tax credits and deductions available to joint filers are reduced or unavailable for couples filing separately, including the Earned Income Tax Credit and the Child and Dependent Care Credit.
At this time, the IRS defines a marriage as a legal union between a man and a woman. Whether or not you are still married when you file taxes or how long you may have been married in the year is irrelevant.
As Brian K. Gilroy, Attorney and CPA, explains, it is your status at the end of the tax year that is important. “If you get married on New Year’s Eve, you’re married for the year. One hour in that year, your status as of December 31st of whatever tax year controls what we do,” says Gilroy.
If you were considered married in the given tax year, you could not file as single, ‘Qualifying Widow(er),’ or as ‘Head of Household,’ even if you were single for most of the year. You have two tax filing options when you are married, explains Gilroy. “When you’re married, you have to either file married, filing jointly or married, filing separately.”
Which filing status you should choose will depend on your circumstances. “There are cases where, if you’re married, it’s better to file jointly, and other cases in which it’s better to file separately- it simply depends on the adjustable gross income of the husband and wife,” explains Mr. Gilroy. “If two singles end up in the lower part of the bracket, and if you were to double them, they end up in the higher part of the bracket, it’s a little different. It just depends on the respective incomes.” If in question, you can have both joint and separate returns prepared and simply file the one that gives you the lower tax. Especially in your first year of marriage, it would be smart to seek the advice of a tax professional to help determine which status would be most beneficial to your particular case.
Mr. Gilroy cautions, “There is a significant number of benefits that you lose when you’re married filing separately.” According to the tax code, married filing separately generally makes a couple ineligible for tax benefits such as the earned income credit, the credit for child and dependent care expenses, the credit for higher education expenses, you can’t exclude the interest on bonds used for educational purposes- these are just a few of the drawbacks of filing separately. In addition, “If one person out of a married couple itemizes, the other must itemize also,” says Gilroy.
If you have been concerned about what has in the past been known as “the marriage penalty,” you need not worry any longer. “There used to be an issue about the fact that if you were single as opposed to married, you paid less money. In the last year, they made everything in half, so the marriage penalty is no longer in place.
The Marriage Tax Penalty or Bonus
When you marry, the way you file taxes undergoes a significant transformation. Couples have the option to file jointly or separately, each choice bearing its own set of implications. Historically, the term “marriage penalty” has been used to describe situations where couples end up paying more in taxes than they would as two single individuals. This typically occurs when both partners earn similar incomes, pushing them into a higher tax bracket when combined. However, it’s not all grim; many couples experience a “marriage bonus,” especially when there’s a substantial difference in their incomes. The blending of a higher and a lower income often results in lower overall tax liability compared to what they would pay individually.
Filing jointly usually brings numerous benefits, such as eligibility for several tax credits and deductions that are unavailable to those filing separately. These include the Earned Income Tax Credit, the American Opportunity and Lifetime Learning Education Tax Credits, and deductions for student loan interest. The choice to file jointly or separately is a significant decision that should be made after careful consideration of your individual financial situation and future plans.
Joint vs. Separate Filing: Making the Choice
The decision between filing jointly or separately is multifaceted. Joint filing often results in lower taxes due to the widened tax brackets for married couples and access to various credits and deductions. However, there are scenarios where filing separately may be advantageous. For instance, if one spouse has significant medical expenses, miscellaneous deductions, or other itemized deductions, filing separately might result in lower overall tax liability, given that these deductions are limited by a percentage of your adjusted gross income (AGI).
It’s also worth noting that filing separately might be beneficial if you’re dealing with student loan payments under an income-driven repayment plan. Since your payment amounts can be based on your combined AGI when filing jointly, filing separately might lower your monthly payments. However, this decision involves a trade-off, as you might lose out on other tax benefits.
The Role of Tax Brackets and Deductions
Understanding tax brackets and deductions is pivotal in navigating the tax implications of marriage. The IRS tax brackets are adjusted for married couples filing jointly, typically doubling the income thresholds of single filers, except at the highest income level. This adjustment can significantly impact your tax rate, potentially lowering the amount of tax you owe as a couple. Moreover, the standard deduction for married couples filing jointly is nearly double that for single filers, offering an immediate financial benefit to most married couples.
However, high-earning couples might find themselves bumping up against the marriage penalty, particularly if they fall into the top tax bracket when their incomes are combined. In such cases, the increased standard deduction might not fully offset the higher tax rate applied to their combined income.
Navigating Changes and Planning for the Future
Marriage also brings about changes in eligibility for certain tax-saving strategies and the need for updated tax planning. For example, contributing to an IRA may have different income phase-out ranges depending on your filing status and whether you or your spouse are covered by a workplace retirement plan. Proactive tax planning, including adjusting your withholdings and estimating your tax liability as a married couple, can prevent surprises come tax season.
Moreover, understanding how potential future changes in tax law could impact your combined tax situation is important. Legislation can shift the landscape of tax benefits and liabilities for married couples, making it crucial to stay informed and consider consulting with a tax professional to navigate complex scenarios and optimize your tax strategy.
The Importance of Communication and Professional Advice
Navigating the tax implications of marriage requires open communication between partners and, often, guidance from a tax professional. Discussing your financial situations, future goals, and any concerns about how marriage will affect your taxes is essential. This dialogue should encompass not only immediate tax considerations but also long-term financial planning, including retirement savings, investments, and estate planning.
Consulting with a tax advisor can provide personalized insights and strategies tailored to your unique situation. A professional can help you understand the nuances of tax laws, evaluate the benefits and drawbacks of filing jointly or separately, and recommend the best course of action based on your income, deductions, and financial goals.
Conclusion
Marriage marks a significant milestone in life, bringing joy, companionship, and a host of financial and tax considerations. Understanding how marriage affects your tax filing is an essential step in building a strong financial foundation for your future together. By weighing the benefits of filing jointly versus separately, taking advantage of tax credits and deductions, and engaging in proactive tax planning, you can navigate the tax implications of marriage with confidence. Remember, the goal is not just to minimize your tax liability but to optimize your overall financial health as a couple. With careful planning and, when necessary, professional advice, you can turn the tax implications of marriage into opportunities for financial growth and security.
