The excitement, joy and anticipation of getting married can be almost overwhelming. With the planning that goes into the wedding it is easy to overlook the tax implications of marriage. Although taxes are probably not high on your summer wedding plan checklist, it is important to be aware of the tax changes that come along with marriage. Here are some basic tips that can help keep those issues under control.
The names and Social Security numbers on your tax return must match your Social Security Administration (SSA) records. If you change your name, it is imperative to report it to the SSA.
Change Income Tax Withholding:
A change in your marital status means you must give your employer a new Form W-4, Employee’s Withholding Allowance Certificate.
If you and your spouse both work, your combined incomes may move you into a higher tax bracket. Use the IRS Withholding Calculator tool at IRS.gov to help you complete a new Form W-4. See Publication 505, Tax Withholding and Estimated Tax, for more information.
To avoid problems and to get specific advice speak with your tax adviser.
Changes In Circumstances:
Marriage can have an impact on insurance. It is important that you report changes in circumstances, such as changes in your income or family size, to your health insurance company (or Health Insurance Marketplace). You should also notify your insurance company when you move out of the area covered by your current insurance plan.
Let the IRS know if your address changes.
You should also notify the U.S. Postal Service. You can ask them online at USPS.com to forward your mail. You may also report the change at your local post office.
Change In Filing Status:
If you’re married as of December 31, that’s your marital status for the entire year for tax purposes. You and your spouse can choose to file your federal income tax return either jointly or separately each year.
Note: Once married, neither of you can file using single status.
Generally and in most cases, married filing jointly results in a lower amount of taxes due. However, you may want to figure the tax both ways to find out which status results in the lowest tax.
Filing Status For Same-Sex Couples:
If you are legally married in a state or country that recognizes same-sex marriage, you generally must file as married on your federal tax return. This is true even if you and your spouse later live in a state or country that does not recognize same-sex marriage. See Same-Sex Marriage Tax Guide: 16 Essential Tax Rules and Tips for a more detailed discussion.
Some Tax Advantages For Married Taxpayers:
Married couples are eligible for many tax breaks. Here are just some examples:
- Utilizing Losses and Carryovers: In certain situations, a single taxpayer with large losses, tax deductions or various loss carryovers may not have been able to take advantage of these tax breaks on their individual income tax return. Marriage and filing jointly may generate an overall tax savings to newlyweds where the second spouse is making enough income to use these losses of the other spouse as tax write-offs. The tax rules (carryover rules, passive loss limitation rules, AMT implications, etc.) are tricky and confusing, so exploring the possibilities with your tax adviser is highly recommended.
- Percentage Limitations: In certain cases, marriage may make it harder to reach the higher minimum percentages of income necessary to deduct medical or miscellaneous expenses, given your joint income, unless one or both of you has significant expenses. The numbers can vary from year to year. Depending on the numbers, it may make sense to either delay or accelerate marriage from one year to the next. This is another reason it is so important to get specific advice based on your particular tax situation.
- IRA: A spouse may contribute to their own individual retirement account (IRA) even if he or she doesn’t work. Additionally, it is important to note that IRA benefits phase out based on income. The benefit for a married couple is that these phase outs are dramatically higher for married couples than they are for single people. A taxpayer who couldn’t pay into an IRA when single can, when married, use the joint income to fund an IRA with the potential to put away thousands of dollars for retirement while receiving possible tax benefits.
- Charitable Contributions: There’s a limit to charitable contributions based on the income shown on a tax return. A single taxpayer who makes charitable contributions may not have enough income to get a current tax benefit for these contributions. Upon marriage, newlyweds report all their income on their joint return. This higher level of income on the joint return may allow for some very large current charitable contribution deductions that would not have been available if the charitably minded taxpayer was still filing as a single taxpayer.
- Home Sale Exclusion: Married couples also have a larger home sale exclusion. They can exclude up to $500,000 in gain from the sale of their home. The single taxpayer exclusion is only $250,000.
- Gifts: Married taxpayers can make tax-free gifts of up to $28,000 where a spouse joins in such gift (annual donee exclusion for 2014 is $14,000 for each spouse). Single taxpayers can only make tax-free gifts up to $14,000 to one person. To learn more about the tax advantages of gift giving and the use of the spousal joinder see my article entitled Gift Giving: Tax Advantages.
- Unified Credit: Married couples can take advantage of the spouse’s unified credit, now $5,340,000, for lifetime gifts, or through portability, death time transfers. For more on estate planning check out my article entitled Estate Planning 2013: Now What? A Must Read For Everyone.
- Benefits: Be sure to compare benefits. If both spouses have benefit packages from their jobs, they can pick the most valuable benefits from the two plans. Compare retirement plan benefits, dependent and child care plans. The right combination of benefits from two plans can dramatically increase a married couple’s tax savings.
Warning About Filing A Joint Return:
In most situations, filing a joint return presents no problems. However, when filing a joint return it is important to keep in mind:
- Joint and Several Liability: It is very important to understand that when you sign the joint return, you are then fully responsible for every number and tax position taken on such return. If your spouse is negligent or fraudulent, you are equally (jointly and severally) liable for the tax consequences unless you can qualify for the innocent spouse exception under Section 6015 of the Internal Revenue Code.
- Note: Jointly and severally liable means that the IRS can come after both of you or just one of you for the full amount of the tax liability reported on the joint return.
- Tax Liability For Years Before Marriage: You are not liable for your spouse’s mistakes or deliberate omissions if they happened on the tax returns filed in the years before you married.
- Garnishment and Refund Offsets: If there’s a garnishment for an unpaid loan or child support against a spouse, a refund could be delayed or blocked.
To avoid this exposure, a spouse filing as married filing separately offers the best option, even though it may result in overall higher taxes. If such situations exist before marriage or arise in the future, it would be wise to discuss this situation with your tax adviser.
Married Filing Separately:
In most cases married filing jointly will result in the least amount of taxes being paid. In addition to filing as married filing separately for the reasons discussed immediately above, it may make sense to file married filing separately in the following limited situations. It all depends on the numbers.
- Large Itemized Deductions: Sometimes one spouse has a large amount of itemized deductions. This often occurs because of illness. Medical expenses are deductible only to the extent that they exceed 10 percent (7.5 percent for elderly taxpayers) of adjusted gross income. If only one spouse incurs most of the couple’s medical expenses, it may be easier to overcome the percentage threshold when only one spouse’s income is reported on the return.
- Employee business expenses and casualty losses, such as damage from a natural disaster to property owned by one spouse, also are common triggers for filing separately. If these expenses are high, they may cut your tax bill if reported on a separate return.
- Unfortunately, some credits and deductions are lost unless you file a joint return. These include:
- HOPE Scholarship credit
- Lifetime Learning credit
- Dependent care credit
- Earned Income Tax Credit
- Adoption credit
- Deduction for student loan interest.
Important Point: You Cannot Have It Both Ways: If you decide to file separate returns, you and your spouse must itemize deductions or take the standard deduction. You cannot itemize deductions on your return and your spouse take the standard deduction on his return.
Advance tax planning before a marriage is a good idea. For example, sometimes it may make sense to have a wedding in the following January and not in December, or vice-versa. It all depends on your specific and particular tax and financial situation. In many cases, tax planning can result in some very significant tax savings.
Also, in cases where older people contemplate getting married, prudence dictates a complete analysis of family considerations, income tax, estate tax and health insurance coverage implications before entering into a second marriage.
It is also important to remember that a prenuptial agreement may make sense in certain situations. For example, unequal amounts of wealth and second marriages are good reasons for having these agreement in place.
Weighing the pros and cons of filing separately is complex and unique to each couple. Many other factors, such as children, Social Security and pension benefits, and residency, impact overall taxes.
If you are getting married, it is always highly recommended to talk with your tax adviser or feel free to contact me sooner than later to get specific advice about your particular tax situation to maximize your tax breaks, minimize your tax bill and to explore the need of a prenuptial agreement in certain situations.
Disclosure and Disclaimer: As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws. This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.
Copyright © 2014 – Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved.