There is not much in our world that is not either directly or indirectly affected by the questions related to taxation. Marriage is one area which is not immune from being affected by taxation, due to the fact our federal tax code treat married and single taxpayers differently. When a couple marries their financial lives, become intertwined. Therefore, a couple who has recently married or is planning to marry should consider how this life change will impact their status as taxpayers and should plan accordingly.
The following topics discuss some of the major changes in tax status a couple will experience upon their marriage.
The most obvious change a couple will encounter after marriage is the change in filing status. Typically a single filer, once married will have the option to use the married filing jointly option or as married filing separately. From tax benefits, perspective couples benefit from using the married filing jointly designation as it results in a greater standard deduction. The benefits of filing married separate exist in a few limited circumstances such as when there is a huge income disparity between the couple or when one spouse has significant deductible medical expenses.
It is important for couples who are recently married to understand that a taxpayer’s marital status for the entire year is determined as of December 31st. Therefore if a taxpayer is married on December 31st, he or she is considered married for the entire year. Therefore it is important to consider ahead how the date of marriage will impact tax filings for that particular year and plan accordingly.
The Federal tax system relies on a system of graduated tax rates. As income increases, a taxpayer moves into a higher tax bracket. Once a couple marries, both spouses’ incomes are combined to determine the tax bracket for the couple. As of combining incomes, the married couple will likely have a higher overall income. Depending on the couple’s income, this may result in a higher tax rate than the individual partners would have been subjected to when single. In the lower lowest tax brackets this is generally not an issue, however, as a couple’s combined income reaches a certain threshold typically thought of to be $75,000, a couple should consider engaging in tax planning to mitigate their tax liability. When a couple’s combined income exceeds $75,000, the tax bracket for those married filing jointly is narrower when compared to single taxpayers. For example, in 2016 a single taxpayer can earn $91,150 of taxable income before reaching the 28% tax bracket.
Based on this example, combining incomes beyond a certain threshold can have a significant impact on taxes. As such, prior marriage couples are well advised to consider the short term and long term implications marriage may have on how income and assets are taxed and plan accordingly so as to minimize their tax liability. In many cases, withholdings can be adjusted, and other tax planning strategies can be used to minimize the tax liability a couple will incur as a result of marriage.