If you married in 2016, you need to know about how your marriage affects your taxes. Most people are aware that they can change how they file, but few know much more than that. Keep reading to learn about the top five things you should be thinking about when you file your federal tax return next year.
1. Update Your Filing Status
The Internal Revenue Service (IRS) considers you as married for federal tax purposes if you were married on December 31 of the prior year.
Married couples may choose to file a joint return or separate returns. Typically, joint filing of taxes after marriage is more favorable. Also, it simplifies filing and saves on the cost of preparing your taxes if you file a joint return.
In some circumstances, however, it can be more favorable to file separate returns. Most often, this comes into play when one of the spouses can take advantage of itemizing his or her deductions. It can also be a good idea to file separately if you are unsure about your spouse’s tax practices, such as failing to pay estimated taxes (when required) or being dishonest on a return.
2. Know about Marriage Penalties and Bonuses
When two previously single people file their taxes as a married couple, they may pay more or less taxes than if they were still single. This is due to several factors, such as differing tax rates and deductions.
Many changes have been made to the federal tax system to avoid penalizing couples who marry. For example, the standard deduction for a couple filing jointly is twice the amount available to a single taxpayer. However, there still can be differences in the amount of tax paid, and, in some instances, couples will actually pay less tax than they would have had they filed as single people. You can learn more about marriage penalties and bonuses at our earlier article “Marriage Tax Penalties and Bonuses: Do Married Folks Pay More (or Less) on Tax Day?”.
3. Get a Break on Home Sale Profits
The IRS requires homeowners who sell their house to pay a tax on profits from the sale. However, single taxpayers may exclude the first $250,000 of profit if they live in the home for two of the prior five years. Married couples get twice that amount. This means that if they live in the home for two of the last five years, they can exclude up to $500,000 on the profit of the sale of their home.
4. Grab Estate Tax Perks
As you accumulate assets in life, such as cars, homes, jewelry, and money, it becomes more important to plan how to transfer those assets. However, even if you have failed to do so at the time of your death, all is not lost. Federal law allows spouses to transfer unlimited assets to each other at death without paying any estate tax.
Here’s the catch: the taxes are merely deferred. However, this tax-free period allows the surviving spouse additional time to position assets more favorably.
5. Use the Right Tax Form
Did you know that something as simple as using the right tax form can save you money? We sometimes get into a routine of using the same tax form from year to year. The IRS recommends, for example, that newly married couples determine whether they can claim enough deductions to make itemizing worthwhile. Although you may not have had enough deductions as a single taxpayer, you may find a different result after you tie the knot.
Yet another benefit only applies in the unfortunate circumstance of losing a spouse. When this happens, the remaining spouse can choose to file his or her taxes as married during the year of death. In addition, if you have dependent children, in the subsequent two years, you can file as a qualifying widow or widower. This filing status provides a larger standard deduction, as well as more advantageous tax rates.
Of course, it goes without saying that you’ll need to update records relating to your marital status. This includes updating your name and address with your employer, as well as formally changing your name with the Social Security Administration, if applicable.
As tax season approaches, your best bet is to calculate your taxes under different scenarios to determine what is best for you. If you need help, contact a licensed tax lawyer or accountant in your state.