Now that you have tied the knot, congratulations! As you might have guessed there are going to be a lot of changes in your life. These adjustments include how you file your income taxes. The way you file and the many possible benefits that you may be able to claim are just the beginning of it.
You and your spouse will need to discuss how you wish to file your tax returns in the coming years. You also need to talk about benefits. These are with respect to refunds or, at the very least, reducing how much you owe when tax time comes around. Marriage may also influence how much you withhold from your paychecks in order to get that refund later on.
We will also clarify the difference between the marriage bonus and the marriage penalty when you decide to file as a couple. These are just a few of the eight most important things you need to know about your finances after marriage. Here is how walking down the aisle can impact your taxes.
1. Determining Your Marital Status
Once you have signed that marriage license your marital status is pretty much self-explanatory. Yet, the IRS has certain distinctions. These are how to determine your status for the purposes of filing your tax return. In general terms, the marital status you designate on your return is based on qualification by December 31st of the tax year that you are submitting a return.
The IRS qualifies marital status by one of the following requirements. If you meet one of these designations then you are considered married for the purposes of filing your taxes:
- You and your spouse are legally married and residing at the same address together.
- You and your spouse are in a common law marriage that is recognized by the state in which you reside.
- You and your spouse are living apart but have not filed for a separation.
- You and your spouse are engaged in an unfinalized divorce proceeding.
- You are widowed or a widower.
The IRS views you as unmarried if you meet one of these standards of criteria and, thus, your filing status would qualify as single.
- You are not legally married to anyone.
- You are legally separated from your spouse.
- You are legally divorced from your spouse and that process has been finalized.
- Your marriage was annulled
Now that you are married, you have the choice of filing your tax returns jointly or separately. Most couples choose to file a joint tax return. Though, some file separately when it benefits them more than the alternative. Each of the filing methods carries specific advantages and disadvantages. Each must be carefully considered and calculated.
2. Filing Separate Returns
Just because you are married does not necessarily mean you must file a joint tax return. Many couples choose to file separate from one another. They do this if they realize their respective refunds are larger or their tax liabilities are smaller than if they chose to file their return jointly. You can file separately with a status of married. That is okay, as long as you and your spouse (or ex-spouse as the case may be) are considered married on December 31 of the filing year.
Many married couples strongly consider filing their returns separately. However, that could result in the loss of certain deductions or exemptions which can only be utilized by filing a joint return. Some couples may find they can benefit by filing separately. Nonetheless, the reality is that doing so does not always mean your tax debt will be reduced.
You and your spouse are now considered married under the law. Thus, you each need to follow certain restrictions for claiming deductions. You each must either itemize or take the standard deduction.
One spouse can’t itemize while the other takes the standard deduction. That is not all. There are other tax benefits that could be denied or become extremely restricted when you file separately from one another. These include:
- Restrictions on claiming either the Child or Dependent Care Credit.
- Restrictions on claiming the Earned Income Tax Credit.
- Denial of exclusion on interest income from U.S. savings bonds that were applied towards education costs.
- Denial of the Credit for the Elderly of Disabled except in situations where the two spouses lived separately from one another for the entire tax year.
- Denial of deductions from interest paid on student loans.
- Denial of the American Opportunity or Lifetime Learning education tax credits.
- Denial of exclusion for adoption expenses and the Adoption Credit.
- Significant reduction in the Child Tax Credit.
These would all be available to joint filers in full without limitation or outright denial. If you can claim any of these credits and deductions, it would be far more beneficial to file a joint return.
3. Filing a Joint Return
As mentioned, most married couples opt for the joint income tax return. That is because of the many benefits that come with it, most of which are listed above. The most important distinction between the two concerns is taking on joint responsibility for all tax liabilities between both partners.
Filing jointly means that you and your spouse both report your respective incomes. By filing on one tax return, you claim all applicable deductions and exemptions. Additionally, you report any possible credits to which you may be entitled. Once you do this, you are jointly responsible for meeting your collective tax liability.
What does that mean exactly? You and your spouse are both expected to pay all tax debts, interest and penalties. These result from the information that is listed on your joint return. This distinction applies to both of you even if one of you did not report any income for the year. You are now legally bound to your collective tax liability together.
In some cases, a spouse can apply for Innocent Spouse Relief. That is allowed when an individual believes that they should not be held fully responsible for their spouse’s tax liability. It can help reduce the burden on the spouse who applies for relief. It is applicable under certain conditions.
Let us say you and your spouse file a joint return. Once the deadline has come and gone, you are not permitted to then amend it to file separately. However, if you file early enough before the deadline, it is acceptable to change to filing separate returns.
There is an exception to this restriction in the event of the death of a spouse. Someone representing the deceased may amend a joint return that was filed by the surviving spouse. They can create a separate return for the deceased spouse. That can be done for a period of up to one year after the return’s deadline. It also includes any extensions that may have been filed in connection with the joint return.
4. Deciding How to File
Not every situation is cut and dry with respect to filing under a certain status. Perhaps you were married but got divorced in the same filing year. As we are already aware, the final determination comes from whether you are considered married by December 31 of the filing year. Maybe you are married but have started divorce proceedings that are not yet finalized by the 31st. In that case, you are still considered married for the purposes of filing your taxes.
In this instance, you and your spouse may still file jointly if you wish. Nonetheless, if the divorce is final by that time, you must file your returns independently of one another. You no longer have the opportunity to file a joint return.
However, that does not necessarily you have to relinquish the possible tax breaks and benefits that come with filing jointly. You do still have the option of filing as Head of Household. Though, that is only if you meet certain criteria that relate to any qualifying dependents on your return.
All dependents must be living in the same residence for more than one year. Additionally, it’s necessary to justify you provided a majority of the expenses needed for keeping the residence in which you are claiming to be a head of the household. If you are unable to meet both of these requirements, then you will have to change your status to a single filer.
When it comes to marriage, taxes can bring about all kinds of implications both good and bad. That has led to the belief that getting married can actually end up penalizing a couple during tax time. That may be feasible. Though, there is also the possibility of earning a bonus from tying the knot.
It all depends on the particular situation of the couple and their income level. The good news is that getting married could result in paying less in income tax than filing as single taxpayers. This is where the bonus comes in. It is all due to the way tax rates gradually increase as income rates increase.
The marriage bonus can benefit some couples. However, the marriage penalty is just as much of a reality for some couples who report their collective earnings jointly. Couples reporting combined incomes may result in one of the spouses being reaching a higher tax bracket than if they had filed under single status.
Congress is working to try to eliminate the penalty. That is because the top 10% and 15% tax brackets for joint filers are currently leveled out. They are twice the amount of the ceiling on a single return. That is instead of less than double, which is what they were at previously.
Higher income is brought into a higher tax bracket. Thus, the threshold on the joint return do not equal double that level of a single filer. Perhaps one spouse makes significantly more income than the other. In that case, reporting them collectively on a joint return could result in the higher income earner ending up in a lower tax bracket.
That is how you get the marriage bonus. The spouse earning more could pay their taxes at the lower bracket rate. As always, be sure to calculate the benefits of filing jointly or through separate returns. Therefore, you know which is the better choice for your financial situation.
6. Adjusting Your Withholding
Now that you are married there is another factor you are going to need to take under consideration. It is the amount you are withholding from your paychecks. This will require you to revisit how many allowances you are taking. Hence, you and your spouse will likely need to discuss dividing them up. Keep cognizant of the fact that every allowance is will greatly benefit the spouse earning more. That is with respect to reduced withholding and an uptick in the amount of take-home income.
Married couples who are both working typically need to be more aware of withholding too little as opposed to too much. They should understand that combining both incomes on a joint return could result in being moved to a higher tax bracket. They may even be forced to pay the Additional Medicare Tax.
However, be are careful with the calculation on your Form W-4. In doing so, you can successfully eliminate your allowances. Thus, you will hit a level of withholding that equals the amount owed for the tax year. You will not be getting a huge tax refund. Consequently, you will not be saddled with a major tax bill either when it comes time to file.
Proper withholding is very important. Everyone loves getting that refund at the end of the year. However, it is certainly preferable to achieve it through qualifying for tax credits and deductions. That is opposed to having too little money withheld from your paychecks.
If that happens, you may have to pay the difference of what you owe at the time you file. Nonetheless, if you have too much taken out, you will have to wait for your refund to get money that is rightfully yours already. No one likes waiting for money. It is even worse when it’s money you didn’t have to give up in the first place.
This is why it is so important to make sure you have set up the proper withholding from your paycheck. You do this by reviewing your allowances. These will play a big role in whether or not you receive a refund. They can also have an impact on qualifying for any applicable tax deductions or credits. Getting married is a good reason to rethink your withholding. It is an excellent time to reconsider how many allowances you are claiming with your employer.
Tax exemptions are a very helpful way to lower your adjusted gross income. That way, less of your income can be taxable. Thus, it behooves you to explore all of the possible exemptions you may be eligible to claim. They will be subtracted from your AGI along with any itemized deductions (or if you chose the standard option) to calculate the amount of your taxable income.
You have two choices for exemptions. They are personal and dependents. Each of these exemptions is worth $4,050 when filing for 2016. You may typically claim two personal exemptions, one for yourself and one for your spouse. A spouse never counts as a dependent. That is reserved for children or other individuals who may qualify to be considered as such.
In those instances, you may claim one exemption for every qualifying dependent. It depends on how many exemptions you are allowed to claim. That will be the amount deducted from your gross income. Each one is worth $4,050. Therefore, those exemptions can really add up.
In order to claim the personal exemption, you have to navigate a few stipulations depending on how you file. Married filers doing so jointly can claim the two exemptions. They can take one exemption for themselves and one for their spouse. Married filers doing so separately may only claim an exemption for the spouse if that spouse is not filing a return. They must have no gross income. Additionally, they cannot already be claimed as a dependent on another taxpayer’s return.
As usual, qualifying for marital status with regard to claiming a spousal exemption on your return is determined by whether you were married on December 31 of the tax year. If you have a separation or finalized divorce by that date, you are not eligible to claim the personal exemption for your spouse. Should your spouse pass away during the course of that tax year, you are still allowed to claim the exemption.
8. Getting a Divorce
Unfortunately, it happens all too often. With this upheaval in your life come implications regarding the way you file your taxes after the fact. The biggest considerations involve alimony and child support payments. That is in addition to the ability to claim dependent exemptions should there be children in the marriage. These issues do not come into play until any divorce matter is finalized by a court of law. Prior to that occurrence, both parties are considered married for the purposes of filing taxes.
Alimony payments have an impact on filing your tax return. That is because anyone paying alimony to an ex-spouse is eligible to claim them as a deduction for every year they file. Any taxpayer receiving alimony payments must also declare those monies as income. This needs to be disclosed for every year they continue to receive that income. For alimony to qualify for a deduction or as income, these payments must be made as part of a divorce settlement, written agreement, or a court order.
Child support is exempt from both conditions. That is due to the fact that these payments may not be deducted. They are not deemed taxable income on any tax return.
9. Dependent Exemptions After a Divorce
Any qualifying dependents may be claimed on only one of the spouses’ tax returns. Both parties may not claim the same dependent. Therefore, deciding which spouse takes the exemption is typically done by ascertaining the residence in which the dependent currently resides.
Since children are the most common dependents in these cases, the decision as to who is permitted to claim them is based on the custodial decree. Whichever parent has legal custody of the children is allowed to claim the exemption. If there is no such decree, the parent with whom the child was residing for more than one year is given the right to the exemption.
There can be exceptions to this rule. Let us say that if the custodial parent signs away his or her rightful claim to the exemption by promising not to pursue it for the children. The other parent may then claim any applicable exemptions instead.
The parent who has the rightful claim on dependent exemptions may also claim a tax credit of $1,000. That is in addition to the exemption for every child in the household under the age of 17. However, that’s only if that parent meets the necessary income requirements in place to take the credit.
Sometimes a parent will try to swoop in and take the dependent exemption. They do this by filing their return before their ex-spouse, the custodial parent, can do so. Nonetheless, when the IRS notices the same dependent’s Social Security number on multiple returns, they will usually launch an investigation. They will decide which return has the right to claim the exemption.
Our Final Thoughts
Getting married should be one of the most important events in your life. While it can bring plenty of joy and happiness, it can also result in a variety of tax consequences. No need to worry, though. Marriage could mean you benefit with tax exemptions and deductions. Many of the changes that affect your taxes are easy to navigate as long as you are well prepared.
Now you have the right information. Hence, you can walk down the aisle with confidence knowing that your taxes won’t be a hassle after you get back from your honeymoon. You can stop stressing about money.