Everything You Need To Know About The Most Romantic Part Of Marriage - How Your Taxes Change
Marriage comes with a myriad of life changes for most people. Your priorities shift, time moves slower, and you even work and fight differently (via Brides). Becoming a legally committed couple also has an effect on how you manage your money, from your day-to-day finances to your taxes. Some parts of your wedding might even be tax-deductible. "You can donate items, including leftover flowers or food, to local organizations and deduct them as a charitable contribution," Lisa Greene-Lewis, a TurboTax tax expert, told Brides.
According to eFile, getting married changes how you file your taxes, but it can also impact your retirement savings, available deductions, and the amount of taxable income you and your partner have. The union also introduces new tax breaks and may remove old ones you're used to seeing, all of which can impact your tax refund (via Kiplinger).
Although taxes are hardly the most romantic part of marriage, they can't be avoided or ignored. Luckily, for most couples, taxes change for the better when you're married despite the overwhelming amount of information you need to remember. If you're planning a wedding in the near future and are concerned about how your taxes may change in the aftermath, the following guide will help you prepare for tax season and keep more money in your pocket.
You can now file taxes jointly
One of the biggest changes married couples experience during tax season is the ability to file their federal income tax jointly. According to Credit Karma, this change in filing status may lead to higher standard deductions and a lower tax bill. It also opens doors to significant benefits that aren't necessarily available to single people or married people who file separate tax returns.
But what exactly is filing jointly and why does it make a difference for couples? Filing taxes as a married couple means that you file your combined income and deductions on the same tax return (via Prudential). This is generally a preferred financial move and one that the Internal Revenue Service (IRS) encourages by offering numerous tax benefits, such as the Earned Income Credit (EIC) or the Lifetime Learning Credit (LLC) to help offset expenses from higher education, per Investopedia. When a couple files jointly, they both become responsible for any penalties or taxes that are due unless one person can prove they didn't know about or benefit from the mistake prior to filing jointly.
"You typically get lower tax rates when married filing jointly, and you have to file jointly to claim some tax benefits," Lisa Greene-Lewis, CPA, tells U.S. News and World Report. However, this isn't always the best path for every couple. "You need to consider your tax rate, your income, and what deductions and credits you're eligible for when you're thinking about filing jointly or separately."
Your tax bracket may change
True love, lifelong companionship, and enduring friendship are some of the best reasons for getting married. However, from a tax perspective, getting married can also change your tax bracket for the better, something that many couples find incredibly attractive. Investopedia notes that tax brackets are simply a range of incomes that a certain income tax rate applies to. Low incomes typically fall into low-income tax rate brackets, while people who earn higher amounts generally fit into brackets with higher tax rates.
"Couples with significant earning differences between the spouses typically reap the greatest savings," Chad Tourin, President of Coastal Wealth's Private Client Group, tells MassMutual. According to Intuit TurboTax, if one person in a married couple has a substantially higher salary than their partner, their partner's lower salary may be able to pull the higher wage earner down into a lower tax bracket. The progressive tax system ultimately reduces the overall taxes you are required to pay.
You may be subject to the marriage tax penalty
If you decide to file a joint return with your spouse, your combined income can also potentially bump you into a higher tax bracket. Commonly referred to as the "marriage tax penalty," this can make it so you and your spouse owe more in taxes than you would if you filed as single. The marriage tax penalty often occurs for moderate-to-high-income earners that make roughly the same amount of money (via The Motley Fool).
According to SmartAsset, the reason for this penalty is that federal and state tax brackets don't always double the single-income rate for married couples who file their taxes jointly. Over a dozen states have the marriage penalty built into their tax bracket, making it increasingly difficult to avoid it. The marriage tax penalty can be offset through itemized deductions. These deductions reduce your adjusted gross income (AGI) and include charitable donations, property taxes, mortgage or student loan interest, and self-employment expenses (via H&R Block).
You have to report your name change to the IRS
Although society and culture no longer dictate that a woman must take her husband's last name after marriage, around 70% of American women still do (via BBC). Most people think of name changes as the sole responsibility of the Social Security Administration (SSA), however changing your name, and potentially your address, does come with tax consequences if not taken care of in an appropriate time frame.
According to the IRS, people experiencing a name change must first notify the SSA to get a corrected Social Security Number (SSN) card with their new legal name. It is important to have the name on your tax return match the name on your SSN card otherwise you may experience significant delays in the processing of your taxes. In most cases, making this change requires filling out Form SS-5 and having documentation that supports the legality of your new name. Newly Named explains that after you update your name with the SSA, you should also contact your employer's HR department to have your benefits and payroll information updated. This will save you time and energy for the following tax season.
Your federal income tax withholding may change
Every individual tax situation is different but many couples find that filing their taxes jointly after marriage results in a larger paycheck as the result of changes in withholding. Federal tax withholding is simply the amount of income tax your employer pays on your behalf (via USA gov). This money is withheld from your paycheck.
The IRS requires couples to change their federal tax withholding within 10 days of a major life event like getting married. To do this, couples should complete the IRS document Form W-4. The amount withheld is affected by the number of people in your family and numerous other tax credits. H&R Block notes that it is important to fill out Form W-4 correctly. Withholding too much or too little can result in a change in the size of your paycheck but may also alter the amount of taxes you owe at the end of the year.
Filing jointly is faster, cheaper, and less complicated
Filing jointly has major financial implications for married couples. It also is much faster and generally less complicated than filing separately. According to Ramsey, when you and your partner file your taxes jointly you only need to fill out one tax return instead of two. As a result, both of you have to spend significantly less time preparing and filing your taxes.
This process makes filing your taxes cheaper as well. Daily Capital notes that having an accountant or a CPA do one set of taxes costs less than individual tax returns. A number of factors contribute to the cost of a tax professional, including hourly rates, set fees, the city you live in, and the complexity of your individual tax situation. However, taxpayers can generally expect to pay around $323 with itemized deductions or $220 if they don't itemize their deductions (via The Balance). Married couples who file jointly save several hundred dollars and also valuable time.
You can give cash or property tax-free
Non-married individuals who transfer something of value to another person without receiving something of equal value in return are subject to the federal gift tax. Under most circumstances, it is the responsibility of the person giving the gift to pay the tax, be it property, real estate, or large sums of money they are giving away. The idea behind the tax was to prevent taxpayers from giving large sums of money away to avoid paying income taxes (via Investopedia).
The IRS sets limits on how much value a gift can be before it has to be reported on a tax return, regardless of whether the person giving the gift intends it to be a gift. Annual exclusions apply up to $17,000 per recipient, with a lifetime exclusion of up to $12.92 million. That means that if you wanted to give a large sum of money to a family member or friend, you could give up to $17,000 before the gift tax was required. Gift taxes range from 18% to 40% depending on the size and value of the gift.
Thankfully, married couples who are U.S. citizens are generally exempt from paying the gift tax when they give gifts to each other. Not only can you give an unlimited amount to your spouse tax-free, but you can also double your gift amount to others. This means that both partners can give up to $17,000 to the same person without necessitating the gift tax.
Your retirement savings grow faster
You may be familiar with the general benefits and advantages of contributing to an IRA, or an individual retirement account. It is not only a smart way to boost your retirement savings but allows you to safely invest in your future. Additionally, there are a number of tax benefits that spousal IRAs provide including the ability to grow your retirement savings faster.
Spousal IRAs are a great option for married couples where one spouse either doesn't receive compensation from an employer or makes less taxable income than their partner, per H&R Block. Opening an IRA for that spouse allows both parties to contribute the maximum amount into the account. The annual limits an individual can contribute to an IRA currently equal $6,500 or your taxable income, depending on which is lower. This means you can effectively double your annual retirement savings if both parties contribute equally. The money that is added to this account belongs to the individual who contributed it, regardless of whether the marriage survives or ends in divorce. Couples that are not covered by an employer-sponsored retirement plan may also be able to deduct the full amount they contributed from their taxes at the end of the year (via Forbes Advisor).
Additional credits and deductions may make your tax refund higher
Not only do the majority of married couples who file taxes jointly save time, money, and a barrage of tax-induced migraines, but doing so can also make your tax refund higher. According to SmartAsset, filing jointly opens couples up to more tax credits and benefits that can be written off. "A tax credit is a dollar-for-dollar reduction in one's tax liability," Logan Allec, CPA, tells U.S. News and World Report. "A tax deduction reduces your taxable income. In general, a tax credit is more valuable than a tax deduction."
Although deductions are not quite as useful as tax credits in terms of the total owed and your potential refund, married couples can increase their tax refund by taking advantage of higher standard deductions as well. For example, married couples who file jointly are eligible for up to $25,100 in standard deductions compared with $12,550 for married taxpayers who file separately (via Intuit TurboTax). Although this doesn't reduce the amount of taxes you and your spouse owe, it makes the combined income you share smaller, thereby reducing the overall amount that is subject to taxes.
Social security benefits improve
Getting married also comes with improved social security benefits. Economist Laurence J. Kotlikoff tells CNBC make it that newly married couples are eligible to collect future widow(er) Social Security benefits after nine months, with the option to collect future spousal benefits after one year. Kotlikoff explains that these benefits are generally of use to couples with a significant income disparity between the two, meaning that if the higher wage earner were to pass away, the lower wage earner would be financially taken care of.
Furthermore, there are more social security benefits for married couples when they retire. According to Money Under 30, couples who retire have the option of receiving 100% of their own Social Security benefits or 50% of their spouse's benefits. It is important to keep in mind that getting married doesn't impact the wages you earn from Social Security. Those earnings are a result of your and your partner's individual work histories, and getting married will not limit or affect the total amount you receive when you retire (via AARP).
Student loan interest and repayment amounts may shift
Many taxpayers who have historically filed as single people are accustomed to deducting their student loan interest on their tax returns. However, according to Bankrate, getting married can change your eligibility for student loan interest deductions. Individual taxpayers are allowed to deduct up to $2,500 in paid student loan interest each year, but being part of a two-income household can potentially bump you out of the running.
The Tax Adviser notes that couples paying back student loans may be able to lower their monthly repayment fee by applying for an income-based plan prior to getting married. However, getting married generally increases the amount of income you have, which can directly impact the amount of money you are required to pay back on your student loans. In this instance, it may be smarter to file separately.
There are also tax benefits available if you or your spouse decides to pursue higher education. The IRS offers two tax credits that allow individuals to take out student loans for themselves or their spouses to cover the expenses of higher education, including tuition and necessary class materials such as computer equipment or books (via Federal Student Aid). Like other tax credits, these offset the cost of school while reducing the amount of available income tax. Alternatively, couples can withdraw money from an IRA without penalty to pay for school, but federal income tax will be owed on the amount withdrawn.
Your charitable donations equal higher deductions
If you have a giving spirit, the IRS permits your charitable cash donations to eligible organizations to be deducted from your federal income tax return. This deduction is available to both married and unmarried individuals. However, unmarried taxpayers can only deduct up to $300 on their tax return while married couples who file jointly can deduct up to $600. This deduction works the same as other tax deductions by reducing a couple's taxable income and lowering the overall amount of taxes owed.
Unfortunately, like all things tax-related, charitable giving deductions aren't quite as simple as writing a check and calling it good. First, only non-profit organizations classified as 501(c)(3) public charities or private foundations are eligible. Secondly, couples looking to take advantage of this higher deduction must choose to itemize their deductions, which requires keeping a record of the contribution (via Fidelity Charitable).
According to Daffy, a married couple's total deductions must also exceed the standard deduction for their tax filing status and bracket before they are considered eligible for charitable deductions. It can be difficult for average couples to donate enough money to meet this standard deduction threshold with cash alone. However, married couples can also donate appreciated assets like cryptocurrencies or stock to their favorite qualifying charity, which may make it easier to exceed deduction limits.