Marriage and Taxes - Every Situation is Different
Did you get married last year? If so, then congratulations – and welcome to a whole new world in terms of filing your taxes. Though wedded bliss brings untold advantages and the promise of companionship for a lifetime, it can also lead to a number of unexpected changes in the way that the government views you and your tax liability.
It doesn’t matter whether you were only married for a few days out of the year, as long you were married on the last day of the tax year, the government considers you married all year long. What this means in effect is that you now have to choose whether to file your taxes jointly or separately – and the decision that you make can have considerable, and surprising, repercussions.
One thing that you need to know from the start is that there’s a good chance that you’re going to end up owing the government more now that you’re a couple, and that there is really no way to game the system. Congress has done a good job of anticipating the fact that people will try to find workarounds and have created rules that work against those strategies being effective.
New Marriage - New Tax Rules
Whether you decide to file jointly or separately, in either case your status has converted to married, and that puts a whole new set of rules in place.
For couples in which both spouses are working, when you add your two incomes together you often end up in a higher tax bracket, and there are specific tax write-offs and advantages that will disappear or diminish. Here are some examples:
- Your capital gains may be taxed at a higher rate
- Your child care credit may be reduced
- The amount that you can deduct for an IRA contribution can be impacted
- You may be taxed on net investment income
- Any Social Security income you receive may be taxed
- Your Earned Income Tax Credit may be reduced
- Any medical or miscellaneous itemized deductions you’ve previously been able to take may be lost or reduced
- Your overall itemized deductions may be similarly phased out
- Your personal exemption deduction may be phased out
At first glance, it may seem as if there is an obvious solution to these problems – simply file separately instead of jointly! As stated previously, the tax code specifically precludes married taxpayers from getting their single benefits back by filing separately.
Getting married does not always represent an increase in tax liability. For couples where only one spouse has income, marriage may actually drop you into a lower joint tax bracket and give you a further advantage as a result of having an additional exemption that can be claimed.
Add to that the fact that there are certain limitations that higher income individuals are subjected to when they are single that may end up no longer applying: the limitations increase proportionally for married couples in the assumption that both spouses work, and if your spouse has no income or a much lower income, you may be able to take advantage of benefits that you previously could not access.
Don't Try to Scam the IRS
The government’s efforts to prevent married couples from trying to work around the system have resulted in higher combined income tax liabilities for married taxpayers who file separately than for those who file jointly. There are a couple of reasons why this is the case. One reason is that the tax code requires married couples filing separately to either both itemize deductions, or neither.
This prevents a couple from both itemizing and taking the standard deduction. Another way that the government has blocked people from circumventing the system relates to the treatment of Social Security benefits. When a couple receiving Social Security benefits files as married but separate, there is no taxable threshold on their benefits – they are taxed on all of their Social Security income.
By contrast, if the same couple were to file as married filing jointly, none of the income is taxable until a threshold is hit: That threshold is an excess of $32,000 for half of the Social Security benefits plus other income. The tax differential is significant.
In addition to being aware of the difference that filing status can make in tax liability, married couples should also consider the fact that it can impact their legal responsibility. When a married couple files jointly, both are responsible – both individually and jointly – for the truthfulness of the information that they provide and the tax liability itself, including any penalties and interest.
By contrast, couples that file married but separately are only responsible for the information that they submit for themselves. Though this may not seem like much of an issue, it can be an important consideration – particularly if a couple later divorces.
Being mindful of your tax filing status is an important step as the two of you start building your future together. We are happy to help you with any questions you may have, or to provide you with an analysis of your particular situation and what approach would be best for you.
Wondering about how your new marriage affects your taxes? Give us a call at (770) 268-3434 and we'll help.