The Tax Ramifications of Getting Married
So you’re getting married? Did you invite the IRS to the wedding? On the list of things to do from hiring the hall, choosing the caterer, and mailing the invitations, don’t forget a visit to your tax advisor.
The first thing you will learn about is the marriage penalty. The marriage penalty is a holdover from an earlier era when single income families were the norm. Since the tax code was written to tax household income instead of individual income; a married couple, both with similar earnings, pays more tax than the total tax of two single taxpayers with the same incomes as the married couple. This higher tax is what is referred to as the “marriage penalty.”
The penalty manifests in two ways: 1) the standard deduction for a married filing jointly return is less than twice the single standard deduction; and 2) the combined income can push the couple higher into the tax brackets. Often the first tax return a couple files after marriage results in a big tax due because of under-withholding or underpayment of estimates. Even if you get married on the last day of the year, for tax purposes you are considered married for the entire year.
The marriage penalty does not apply to all married couples, it depends on the husband’s and wife’s respective incomes. Tax laws in more recent years have actually eliminated the marriage penalty for tax payers in lower tax brackets. So here’s the good news: there’s no marriage penalty built into the tax rate schedules in the 10% and 15% tax brackets.
Having decided to combine their lives, newly weds now combine their income. The decision as how to report this combined income on tax returns should be a topic of discussion with the tax advisor. Many credits and deductions are based on the total income reported on the return. When two taxpayers get married, their combined income may now be too high for certain tax credits. For example, a single mom qualifies for the Earned Income Credit. She marries a man making a good salary, and now their combined income on a joint return is too high for the Earned Income Credit.
Worse, the woman has a low amount withheld on her earnings because she expects to get the Earned Income Credit. After the marriage, she finds out the amount withheld is not enough to cover her share of the tax.
A single person can deduct up to $3,000 in excess capital losses against ordinary income, but the amount doesn’t double to $6,000 for a married couple – it remains $3,000.
A single person who actively participates in renting out real estate can deduct up to $25,000 of losses against his or her earned income if his or her modified adjusted gross income is $100,000 or less. This deduction is the same for a married couple as it is for a single person.
While filing a joint return results in a lower tax for most couples, they don’t have to file joint returns. They can file as “married filing separately.” Married filing separately is not like filing two single returns. In our example, the earned income credit can’t be claimed at all on a married filing separate return. Some other credits and deductions , such as the Child and Dependent Care deductions, American Opportunity and Lifetime Learning credits, the student loan interest deduction and the up to $25,000 of rental real estate losses are not allowed on a married filing separate return.
On the plus side, newly married couples may have increased limits for tax-deductible IRA contributions. If the couple’s income meets certain limits, they could qualify for more of a deduction. In some scenarios, one spouse also may “borrow” from the other’s earnings to meet the limits.
Likewise, if a spouse claims medical expenses or other itemized deductions that are limited by their adjusted gross income, filing separately may be the way to go because the single income produces a lower limit. However, if the spouse wants to claim credits or deduct his or her IRA contribution, the couple probably needs to file jointly.
Sometimes only after the wedding, you find our that your spouse has debts, back child support, defaulted student loans, unpaid income taxes, you name it. All of these things can be offset against taxpayer refunds. You might find your tax refunded scooped to pay your spouse’s debts. This can be a nasty surprise. There is a procedure, the Injured Spouse Allocation, whereby the debt-free spouse can get his or her share of the refund, but it takes months to actually get the money.
Everyone’s situation is different, so it is important to consult with a tax professional before making any important decisions, especially the decision to marry.