When you get married>, your tax situation changes for better or for worse and there are decisions to make regarding how the two of you should file. Here are the most important things to know.
Married at Year-End Means Married for the Whole Year
Your marital status on Dec. 31 determines your tax filing options for the entire year. If you re married at year-end, you have only two choices: (1) File jointly with your new spouse, or (2) Use married filing separate status for a separate return based on your income and your deductions and credits. Most married couples file jointly. Here s why:
* It s simpler. You have to file only one Form 1040, and you don t have to worry about figuring out which income, deduction and tax credit items belong to which spouse. Other things being equal, simple is good!
* It s often cheaper too. That s because using married filing separate status makes you ineligible for some potentially valuable tax breaks, such as the child-care credit and the two higher-education credits. Therefore, filing two separate returns often results in a bigger combined tax bill than filing one joint return.
If You File Jointly, You re on the Hook for Your Spouse s Tax Misdeeds
Despite the preceding advantages, filing jointly is not a no-brainer for one big reason. For any year that you file a joint return, you re generally jointly and severally liable for any federal income tax underpayments and penalties caused by your new spouse s unintentional tax errors or omissions or deliberate tax misdeeds. Joint and several liability means the IRS can come after you for tax underpayments and penalties if collecting from your spouse proves to be difficult or impossible. They can even come after you long after you ve become divorced. However, if you can prove you didn t know anything about your spouse s tax failings, had no reason to know and did not personally benefit, then you can try to claim an exemption from the joint-and-several-liability rule under the so-called innocent spouse provisions. Believe me, this is easier said than done.
In contrast, if you file separately, you have no liability for your spouse s tax screw-ups or intentional misdeeds. Period.
Bottom Line: If you have doubts about your new spouse s financial ethics in general and their attitude about paying taxes in particular, I suggest filing separately until those doubts are completely dispelled. Although your tax bill might be somewhat higher than if you file jointly, it could be a small price to pay for insurance against the joint-and-several liability threat.
Will You Pay the Marriage Penalty or Collect the Marriage Bonus?
You ve undoubtedly heard about the tax penalty on marriage. It causes some (but not all) married joint-filing couples to owe more federal income tax than if they had remained single. The reason: At higher income levels, the tax rate brackets for joint filers are not twice as wide as the rate brackets for singles.
For example, the 28% rate bracket for singles starts at $82,400 of taxable income (for 2010). For married joint-filing couples, the 28% bracket starts at $137,300. If you and your spouse each have $80,000 of taxable income, you ll get socked with a $681 marriage penalty because $22,700 of your combined income falls into the 28% rate bracket. If you stayed single, none of your income would be taxed at more than 25%.
On the other hand, many married couples actually collect a tax bonus from being married. If one spouse earns most or all of the taxable income, it s highly likely that filing jointly will reduce your tax bill (the marriage bonus).
Bottom Line: If you and your new spouse both earn healthy and fairly equal incomes, you ll likely fall victim to the marriage penalty. If not, you ll likely collect the marriage bonus.
Selling a Home After Getting Married
Say you and your spouse both own homes. If you sell yours for a profit, up to $250,000 of the gain will be free from any federal income tax if you owned and used the home as your principal residence for at least two years during the five-year period ending on the sale date. The same is true for your spouse. So you could both sell, and you could both potentially claim the $250,000 gain exclusion deal for a combined federal-income-tax-free profit of up to $500,000.
Say you sell your home, and you both move into your spouse s home (this could happen before or after you get married). After you ve both used that home as your principal residence for at least two years, you could sell it and claim the $500,000 joint-filer gain exclusion. In other words, you could potentially claim a $250,000 gain exclusion on the sale of your home, and with a little patience claim a later $500,000 gain exclusion on the sale of your spouse s home. That s what I would call good tax planning!
For More Information
This article hits what I think are the most important tax implications of getting married. Needless to say, there s more to the story. For additional information, check out IRS Publication 504 (Divorced or Separated Individuals) at www.irs.gov. The name of the publication is misleading. It actually has almost as much to say about getting married as getting divorced or separated.