Did you know that whether you and your fiancé are married on January 1st of this year or December 31st, for tax filing purposes, you will be considered married for the whole year?
That may be one of the many tax surprises that awaits you post nuptials. Currently, you and your partner are likely filing as Single or Head of Household. This means that you’re focusing on only your income, deductions and tax breaks. After marriage though, income and deductions can be combined. Before you jump into filing Married Filing Separately or Married Filing Jointly status however, there are some important things to keep in mind.
Married Filing Jointly (MFJ)
After you walk down the aisle, your tax picture will likely change – and it’s usually for the better. According to the IRS, by filing jointly, you and your spouse report your combined income and deduct your combined allowable expenses. You may still file jointly even if one of you had no income or deductions. The benefits to filing jointly come in a variety of ways. For example:
- If you each have individual investment accounts and one does significantly well and the other racks up some losses for the year, instead of paying taxes on the gains in the investment that did well, the losses from the other account can offset the gain and in turn, the taxes due.
- If before marriage, you and your fiancé individually owned homes that were considered principal residences (i.e. you lived in them 2 out of the previous 5 years) and wanted to sell at a gain, you would each be able to exclude $250,000 respectively in profits from your individual taxable incomes. Once married, if you both owned and lived in a home as a principal residence which you wanted to sell, you would be able to combine your exclusions for a total of $500,000 in profits for which you would not owe any capital gains tax on.
Married Filing Separately (MFS)
While filing jointly is the easier and cheaper option of the two available to a married couple, it may not always be the best choice. When you file a joint return, you and your spouse may both be held responsible for any taxes, interest or penalties incurred on your return. This means that if your spouse has some questionable filing practices, or makes any unintentional omissions or errors, you are both responsible for the additional tax assessed, whether one or both spouses earned the income. Married Filing Separately may make sense when you’re not too clear on your spouse’s financial reporting habits and overall thoughts on tax payments (although this can definitely be added to your money huddle agenda). In addition, if you’ve experienced a significant amount of un-reimbursed medical expenses for the year, MFS may help you to claim them. In general you can’t deduct these un-reimbursed expenses unless they exceed 7.5% of your adjusted gross income, which is a hard number to hit if you are filing with two incomes. If you were to file separately however, you may have a chance of deducting some of that amount. It’s important to note that if you chose to file your taxes as Married Filing Separately, certain credits and deductions that you would receive when filing jointly will be forfeited. These include:
- Child and Dependent Care Credit
- Adoption Expenses & Credit
- Student Loan Interest Deduction
- College Tuition Deduction
- Earned Income Tax Credit
- American Opportunity Tax Credit
Marriage Penalties and Bonuses
The marriage penalty isn’t a predetermined amount or tax rate that one pays. It’s the higher tax amount required from a married couple filing a joint tax return versus if the same couple had been single and filed two individual returns with the same income. It’s important to note that the exact opposite also exists and there is a marriage bonus, which far outnumbers the amount of penalties. This refers to the lower tax amount required from a married couple filing a joint tax return versus two single individuals who file with the same income. You can use this calculator from the Tax Policy Center to confirm whether you’re receiving a penalty or a bonus from your married status. Figuring out your taxes as both Married Filing Separately and Married Filing Jointly will be your safest bet to determine which option produces the lowest tax bill, but overall, you may find the filing jointly is the best option. Like what you read? Sign up for the Workable Wealth community for more tips and resources and receive 9 Steps to Workable Wealth, a free guide to help you kick start your financial journey.