With wedding season in full swing, couples old and new alike have partnership on the mind. If you’re married (or about to be married), you probably already know that teaming up on financial planning is important. Joining your financial lives means having frank discussions about your goals, any outstanding debts, and how you’ll handle the management of your accounts.
But you should also be aware of how your decisions can affect your income taxes. There are several tax issues related to marriage that are helpful to understand as you make your plans. First, you should pay close attention to your selection of an income tax filing status. To make your choice, it also helps to have some knowledge of the rules for innocent spouse relief and injured spouse claims. You can learn more about those claims by visiting the IRS’ website. Trying to decide if both spouses will work outside of the home? A second income analysis can help measure the after-tax benefit of both spouses working.
Choosing your filing status.
Your filing status is important because it helps determine your deductions and credits, the amount of your standard deduction, and the correct amount of tax. So, you need to know which filing statuses are available to you and which one will best fit your needs. There are five possible filing statuses:
- Married filing jointly.
- Married filing separately.
- Head of household.
- Qualifying widow(er) with dependent child.
Same-sex marriages are now recognized by every state and the federal government. However, for federal tax purposes, marriage does not include registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.
Although many married couples choose to file their tax returns jointly, you should consider both the advantages and disadvantages of joint filing status. Advantages include ease of filing (one return instead of two!) and potential to maximize your tax savings. But be aware: If you sign a joint return, you generally take full responsibility for the accuracy of the information in it.
Wait, I’m responsible for what?
Two people, one return — what could go wrong? If your spouse intentionally underreports his or her income, you could be liable for IRS interest and penalties. In some cases, however, you can be relieved of responsibility for your spouse’s mistakes. This is known as innocent spouse relief, and is requested by filing a claim with the IRS.
Another consideration is whether your spouse has certain types of debt that might affect your tax refund. If you file jointly, it’s possible that your entire tax refund could be used to offset your spouse’s debt, such as student loans, taxes, and past-due child support. Think it’s not fair to lose your portion of the tax refund because your spouse owes money? If you’re not responsible for that debt, you may be able to file an injured spouse claim to get your share.
To work or not to work.
Another decision you may have to make is whether both you and your spouse should work outside of the home. You may be thinking about this if you have children or if one of you is thinking about going back to work after retiring and collecting Social Security. If you’re wondering whether a second income is a good idea, consider the effect on your day-to-day life as well as the financial and tax implications.
To help with your decision, you can perform a second-income analysis to explore the benefits of a second income. Yes, you’ll be taking in more money if both of you work. But other expenses might come along with that, such as commuter expenses, daycare costs, and dry-cleaning bills. You’ll also need to look at how a second income could affect your taxes. Will the extra money push you into a higher tax bracket or affect your eligibility for certain tax credits?
If you’re retired and receiving Social Security, consider how going back to work might affect your benefits. In certain cases, you may have to include 50% to 85% of Social Security benefits in your taxable income. Also, if you’re under the full retirement age and earn more than the annual exemption amount, your Social Security benefits may be reduced.
Remember that there are no “right” or “wrong” answers to choosing your filing status or deciding whether to work. Your financial situation is as unique as your marriage. Partner up and tackle tax topics like you do everything else — together.