- Learn about your filing options.
- Learn the pros and cons of married filing jointly.
- Determine whether or not married filing separately may be an option for you.
- Identify the agencies, etc. you need to inform of your marriage.
- Discover other issues you may not have considered.
When you decided to get married, you may not have thought about the words marriage and taxes together. In this blog, Fiducial breaks down the major questions: What are your filing options? What are the positives and negatives of filing jointly? Why might married filing separately be a worthwhile option for you? We'll touch on the agencies and/or people you need to notify of a change in your marital status. And lastly, there are a few other less talked about things to consider.
Marriage and taxes: What you need to know
How do marriage and taxes go together? There are a lot of answers to that question, but let's start at the beginning. A taxpayer’s filing status is based upon his or her marital status at the close of the tax year. If you get married on the last day of the tax year, you're treated as married for the entire year. The options for married couples are to file jointly or separately. Both statuses can result in surprises – some pleasant and some unpleasant – for individuals who previously filed as unmarried.
Married Filing Jointly–Pros and Cons
When most people think about marriage and taxes, they think about married filing jointly. Individuals filing jointly must combine their incomes. If both spouses are working, combining income can trigger a number of unpleasant surprises, as many tax benefits are eliminated or reduced for higher-income taxpayers. The following are some of the more frequently encountered issues created by higher incomes:
- Being pushed into a higher tax bracket
- Causing capital gains to be taxed at higher rates
- Reducing the child care credit
- Limiting the deductible IRA amount
- Triggering a tax on net investment income that only applies to higher-income taxpayers
- Causing Social Security income to be taxed
- Reducing the Earned Income Tax Credit
- Reducing or eliminating medical deductions
Filing separately generally will not alleviate the aforementioned issues. The tax code includes provisions to prevent married taxpayers from circumventing the loss of tax benefits that apply to jointly filing higher-income taxpayers by filing separately.
On the other hand, if only one spouse has income, filing jointly will generally result in a lower tax. This happens because of the lower joint tax brackets and a higher standard deduction (double the amount for unmarried ($24,400 for 2019)), if the couple doesn't itemize deductions. In addition, some of the higher-income limitations that might have applied to an unmarried individual with the same income may be reduced or eliminated on a joint return. Understanding how marriage and taxes go together can be complicated. A Fiducial representative can explain how these issues may affect you specifically.
Married Filing Separately
Filing as married but separate will generally result in a higher combined income tax for married taxpayers. For instance, if a couple files separately, the tax code requires both to itemize their deductions. If either spouse does so, meaning that if one itemizes, the other cannot take the standard deduction. Another example relates to how a married couple’s Social Security (SS) benefits are taxed. On a joint return, none of the SS income is taxed until half of the SS benefits plus other income exceeds $32,000. On a married-but-separate return, and where the spouses have lived together at any time during the year, the taxable threshold is reduced to zero.
Aside from the amount of tax, another thing to consider when talking about marriage and taxes is that when married taxpayers file jointly, they become jointly and individually responsible (often referred to as “jointly and severally liable”) for the tax and interest or penalty due on their returns. This is true even if they later divorce. When using the married-but-separate filing status, each spouse is only responsible for his or her own tax liability.
Once a couple files as married filing jointly they cannot undo that. However, if they file separately, they can later amend that filing status to married filing jointly.
To whom should you send a change-of-name-and-address card?
Once the knot is tied, the Social Security Administration should be notified of any name changes. If the couple has moved, the IRS needs to be notified of the couple’s new address. In short, the IRS needs to know how to find you. Avoiding them in any way (even as an oversight) just isn't a good idea.
Have you considered how your healthcare might be affected by marriage and taxes? The IRS isn't the only one who needs to be on your to-notify list. If either or both of the newlyweds purchased their health insurance through a government marketplace, the marketplace should be advised of the couple’s marriage so that any advance premium tax credit (APTC) being applied to pay the insurance premiums can be adjusted when necessary. Doing so could prevent having to repay some or all of the APTC when filing their federal return(s) for the year of the marriage.
Last but not least, the couple needs to notify their employers of their new marital status so any affected benefits can be updated. Usually new W-4 forms should be prepared and given to their employers so income tax withholding can be revised for the new filing status.
What else do you need to know?
Other issues that may come into play with marriage and taxes and should be considered are:
- If one of the spouses has an outstanding liability with the IRS or state taxing authority, that situation could jeopardize any future refund on a jointly filed return.
- It may be appropriate not to commingle income from assets a spouse wants to maintain as separate property or where the spouses want to name separate beneficiaries.
- Individuals marrying later in life may wish to keep their incomes separate or only pay the tax on their own income.
If you have questions or would like an appointment to evaluate the impact of marriage on your tax liability before saying 'I do,' call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. A Fiducial representative can go over your specific information and advise you on the most beneficial way to file your taxes once you've said your vows.