The decision to marry can be an overwhelming period with all the planning that surrounds the actual ceremony of being married. The tasks of the marriage ceremony when combined with the fact legally two single individuals will now have a combined legal identity, particularly in the eyes of the federal and state tax codes. This is not to say that individuals lose their legal status upon marriage rather for taxation purposes a married couple is treated as a combined economic unit. Therefore, once a couple marries the each tax concerns are shared between the couple.
The following are some important tax considerations that can be useful in financial planning by newlyweds
For couples who are planning to have children, it is important to understand that the federal and state tax codes allow for exemptions for biological and adopted children. An exemption reduces taxable income whereby tax credits are not subtracted from taxable income, but directly from a person’s tax liability. In addition to the question of children born in the marriage, tax considerations can also arise regarding children brought into the marriage in which a parent who shares custody may be allowed to claim the child as dependent as part of a custody settlement.
When a couple is married, they will likely elect to file jointly although some couples with a significant income disparity between spouses or if a spouse has significant deductible medical expenses may choose to file as married filing separately. When compared to filing as single taxpayer couples who file their taxes jointly will, of course, have a combined income which can result in being placed in a higher tax bracket resulting in a higher tax rate. Based on these considerations it is important to plan for ways to mitigate tax liability in the event a couple may be facing a higher tax rate than expected. However, it is important to note any increases in the tax rate will be the result of a higher income which would imply a greater ability to pay.
A spouse may enter a marriage with an existing business or may start a business while married. In the case of a business that is structured as a sole proprietorship or if the spouse works as a 1099 contractor, it is important to remember that this income will go into the calculation of household income. Similarly, any losses or deductions that arise from the business venture can be deducted from household income. For businesses which are structured as a business entity that does not allow for pass through (income that is attributed to the individual rather than the company), it is important to understand that this type of entity would not likely be considered part of household income and not affect a couple’s tax liability. However, businesses with pass income would be treated as family income.
Understanding the tax implications of marriage may not be the most romantic activity a couple will engage in, but it can certainly create a piece of mind and help a couple remain on stable financial ground.