When you walk down the aisle, your vows aren’t likely to include the words “Till death—and taxes—do us part.”
But including that clause may not be such a bad idea, because once you tie the knot, your tax situation has the potential to go from simple to complex fast—not to mention the fact that you’ll have to reconcile any disparate tax strategies.
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For instance, Melissa and Lee Bernhoft, Houston–based newlyweds who got married in April, have two very different attitudes toward declaring exemptions: Melissa likes to declare more, while Lee prefers fewer.
“My expectation is that I’ll have to pay [the IRS] back, but that’s not her style. She would prefer to give Uncle Sam an interest-free loan,” says Lee, 30, a finance professional. Meanwhile, Melissa looks forward to getting a refund. “It makes me more nervous to have to owe a big lump sum of money,” says the 33-year-old IT audit relationship manager. “And I’m nervous that because my husband under-declares I don't know if I'm going to get that sweet little check I’m used to.”
The one thing they can agree on? For the first time ever, they’re going to use an accountant to help them file and navigate their new tax situation.
If you’re newly wed like the Bernhofts, chances are you’re also confused by the uncharted tax territory that lies ahead. And with less than two months to go until the filing deadline, a good place to start would be simply to understand what’s different now that two incomes have become one.
So we asked a few tax professionals to outline some of the most significant changes that happen once you go from single to married. Here are four major differences to consider before you file.
1. Your filing status will change
You’ve kissed the single life goodbye, which also means kissing goodbye your single filing status—you must now file as either married filing jointly or married filing separately.
For most couples’ tax situations, married filing jointly will likely make the most sense. Not only could you enjoy a lower federal tax rate than when you were single, you’ll also be able to take advantage of tax breaks like the earned income credit (EIC) and various educational deductions and credits that aren’t available to couples who file separately, says Lisa Greene-Lewis, a CPA and TurboTax expert based in San Diego.
The likeliest reason to choose a married filing separately status would be if you feel one of you is at risk for an audit or has tax “baggage,” like owing a lot in back taxes, says Andrew Poulos, a greater-Atlanta-based tax accountant and principal of Poulos Accounting & Consulting. Filing separately will help provide some protection from tax liability for the other spouse. “If one spouse has a balance owed to the IRS from prior years, filing as ‘married joint’ allows the IRS to offset any refund from their joint return against the prior collection balance owed by one of the spouses,” he says.
The overarching rule to remember? “The minute a couple signs a tax return as ‘married joint,’ it doesn’t matter whose share of the money creates any sort of liability—both spouses are equally liable for the full amount even if they are divorced at some point in time,” Poulos adds.
2. You’ll probably change tax brackets
For better or for worse, as a newly married couple you’ll likely be entering a new tax bracket together. Whether or not that works in your favor depends on your individual situation, but generally, the more disparate your incomes, the more likely you’ll be able to lower your tax burden. This is sometimes referred to as the “marriage bonus.”
For instance, if your income is $40,000, as a single filer you would fall into the 25% tax bracket for 2015. Let’s say your spouse makes $30,000. If you file jointly, your $70,000 household income now pushes you both down into the 15% tax bracket.
If you both earn similar incomes, and particularly if you’re high earners, you’re more likely to experience the “marriage penalty”—having a higher tax burden than you would have had if you were filing as single. “Adding two high, equal incomes together could easily push a married couple’s income into a higher tax bracket, which results in a ‘penalty,’ ” Poulos says.
For example, a single person who makes $80,000 would be in the 25% tax bracket, but a couple earning $160,000 falls into the 28% bracket for 2015. Not only that, but the higher your joint income, the more likely you’ll be phased out of qualifying for various deductions or credits.
‘When married filing separately, if one spouse claims itemized deductions, the other spouse has to claim itemized deductions even if they don’t have any—and both spouses can’t claim the same ones.’
3. Your standard deduction will go up
Couples filing jointly for the first time this year can expect to see their standard deduction double: For 2015 taxes, the standard deduction for single filers is $6,300; for married filing jointly couples, it’s $12,600.
However, with two people’s expenses in the mix, it’s possible that you may choose to itemize your deductions this year—you’ll just have to do the math to see if it’s worth it. For instance, one of you may have made a lot of charitable contributions this year, or may own a home through which you qualify for a lot of home-ownership-related deductions—it would be worth itemizing deductions on your joint return only if they add up to more than $12,600.
Just keep in mind that if you’re married but filing separately, deductions can get a little tricky, because “if one spouse claims itemized deductions, the other spouse has to claim itemized deductions even if they don’t have any—and both spouses can’t claim the same itemized deductions,” Poulos says. In other words, you will have to decide as a couple who gets to claim which deduction on your separate 1040s.
Additionally, couples who make over $309,900 will see a phase-out of the value of the itemized deductions thanks to a tax provision known as the Pease limitation, says Greene-Lewis. “Pease limitations reduce the amount of itemized deductions that high income earners can take, like mortgage interest, charitable contributions, and property taxes,” she adds. “Every year there is an income threshold amount set where the limitations will kick in.”
4. You might owe money on those months spent single
One of the most surprising things that couples learn when filing taxes is that whether you got hitched on January 1 or December 31, the IRS counts you as “married” for that entire calendar year.
“The biggest challenge to a lot of couples is they end up owing taxes because they were under-withheld [during the portion of the year they were single],” Poulos says. This would especially be the case for couples who get bumped into a higher tax bracket as a result of their joint income, as we saw for the couple earning $80,000 each in No. 2. Ultimately, they may end up paying more in taxes to make up for what they didn’t pay while they were in their lower, single-person tax bracket.
That said, most married couples tend to fall on the side of fitting into lower tax rates at higher combined incomes, says Greene-Lewis. Plus, there’s still the higher standard deduction and being eligible for additional tax deductions and credits you may not have been able to take in the past. Generally speaking, “all of these factors allow a couple that files ‘married filing jointly’ to have lower tax liability,” she says.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Unless specifically identified as such, the individuals interviewed or otherwise listed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services and the views expressed are their own. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company.