How Marriage Can Affect Your Taxes
Getting married is one of the biggest changes you can face in life. Decisions, actions, and the consequences thereof no longer affect only you, but your spouse, as well.
Taking the plunge can affect everything from your personal living space, to the people you see regularly, to the activities you perform on a daily basis. It can also significantly affect your financial life in a multitude of ways, one those being the dreaded “T” word: TAXES!
Here are nine critical tax issues to think about when you tie the knot:
- Filing Status. Married filing jointly and married filing separately are now the only statuses you can use to file. The IRS considers you “married” for the tax year if you are married as of December 31, so even if you make it official on New Year’s Eve, filing as single is out the window for that year. Married filing separately reduces or totally eliminates several deductions and credits, so typically - but not always - married filing jointly is a better option.
- Brackets. The tax bracket you are in determines the highest percentage you will pay on income above a certain threshold, and brackets are determined differently for each filing status. Even if your income doesn’t change, getting married could mean you are in a different tax bracket than when you were single.
- Standard Deduction. Filing a joint return allows you to claim two personal exemptions instead of just one, but this is subject to phase-out at certain income levels. It also allows a higher standard deduction ($12,600 in 2015) if you do not itemize deductions.
- W-4 Changes. This can be a really big deal, depending on both your situations pre-marriage, and is one that personally affected me and my wife. I knew to review this, but life got in the way and neither of us changed our W-4 status and exemptions post-marriage. In our case, this caused us to under-withhold throughout our first year, leading to a relatively large tax bill in April. There are several ways to look at this, but from a planning perspective, a large outlay to cover a tax bill in April can significantly affect reserves and cash flow. I would highly recommend using the IRS withholding calculator to determine how to fill out your new post-marriage W-4.
- Buying or Selling a Home. The dual income that potentially comes with marriage could allow you to comfortably purchase a home. Although there are many other factors to consider before buying a home, if you do purchase, the interest you pay on the mortgage is deductible if you itemize. If one or both already owned a home pre-marriage and are selling going into marriage, the amount of gain you can exclude from income doubles from $250,000 to $500,000. There is a caveat: if only one newlywed owned the home pre-marriage, the increase to $500,000 only applies if both you have lived in the house as a primary residence for two of the past five years.
- Itemizing vs. Standard Deduction. Each year you must decide whether you will take the standard deduction (see #3 above) or itemize deductions. Events that sometimes follow marriage, such as the purchase of a home, can greatly affect whether or not you decide to itemize or take the standard deduction.
- Estate Planning and Gift Tax. One big key to remember when you get married is that spouses are allowed to give each other unlimited gifts of cash and property without having to pay gift taxes. It also affects how much you can gift to others. Through gift splitting, gifts of property or cash made by one spouse to a third party are considered to be made one-half by each spouse, effectively doubling the amount a couple can gift to someone without being taxed on the contribution. NOTE: You can only gift this way once you are married. Technically, you should consider engagement rings and other pre-wedding gifts when answering how much you have gifted to a non-spouse during the year.
- Social Security Name Change. I personally didn’t have to deal with a name change, but my wife did, and it was somewhat of a pain. One thing to remember is that your tax return is filed under your social security number. To avoid additional headaches, it is important that the Social Security Administration has processed any name changes before your return is filed with the IRS.
- Marriage Penalty. I could write an entire blog on this topic, but here is the high-level information you need to know. The marriage penalty is basically when a married couple is required to pay more in taxes than would be required if the same two people were to file as singles. One cause of the marriage penalty is that income tax brackets and standard deductions for married brackets are not always equal to twice the single income tax bracket and standard deduction. In general, single income married couples typically benefit from filing as married because of income splitting, while dual income married couples have a greater chance of paying the marriage penalty.
The information above is meant to be a basic overview of tax issues to think about when you enter marriage. It is always a good idea to consult with a tax professional when life changes affect your taxes. Marriage is definitely one of those times.