When you get married, taxes may be the last thing on your mind, but marriage can change the way you file. How one income or two incomes affect your taxes can be confusing. Understanding the implications of having two incomes in your household is important.
Marriage comes with a lot of decisions. From kids, to work, there can be a lot of things to figure out.
These days, it seems, it is more and more common for both parties in a relationship to be employed. Filing as a married couple can be confusing, especially if you don’t understand how two incomes can change your tax bracket or tax rate.
We are going to look into some of the common things that can happen when you get married and how they can impact how you file your taxes. There is much more to know than just the marriage tax benefit and the added security of having two incomes in your household.
Generally, married couples have two options when filing their tax return: married filing jointly or married filing separately. Your filing status is important in determining your taxable income, amount you owe, filing requirements and eligibility for different tax credits and deductions, such as the standard deduction.
Understanding how the federal government defines a year of marriage is almost important to understand your tax filing status. For federal income tax purposes, if you are married on the last day of a tax year, you’re considered married the entire year. For example, if you get married on December 31, 2020, you’re considered married for the entirety of the 2020 tax year.
The tax filing status you choose will significantly affect how your income taxes and tax refunds are calculated. Filing a joint return will likely lead to drastically different tax rates and brackets than filing separate tax returns.
If you and your spouse decide to file joint taxes, you must combine your income and allowable expenses and report them on one tax form. It is important to check to see if you live in a community property state (Arizona, California, Texas, Louisiana, Washington, Idaho, New Mexico and Wisconsin), you can use Form 8958 to separate income and deductions between you and your partner.
If you are a married couple that files separately – and you do not live in a community state – you simply report any income you personally earned and deduct any expense you paid.
Married and want to file separately?
Most of the time, there is not really any advantage to filing separately. Issues may arise if the parties involved make vastly different incomes – in these instances, it can make sense to file separately.
In joint returns, both spouses are equally held responsible for all taxes, interest and penalties due, even if most of the income is earned by one person. This becomes a problem when one spouse has a small income and usually gets a huge tax refund and the other has too little tax withheld. These refunds will go straight toward paying for the joint tax bill.
How you file impacts your tax liability. Comparing your tax liability between each filing status is important to help you determine the most beneficial filing approach for you and your family.
Marriage tax benefit
There can be many benefits to filing together. In some cases, people filing together will pay less in taxes than they would if filing separately. Other benefits include:
- Your tax rate may be lower than if you file separately.
- You can take the adoption tax benefit (if applicable).
- You have the ability to claim education tax benefits including the student loan interest deduction, the American opportunity tax credit and the lifetime learning credit.
- You can take deductions up to $300 for capital losses.
- You have a higher limit to your charitable donations, therefore you can take a higher deduction for it.
The downsides to filing together
This is what is known as the “marriage penalty.” This penalty happens when a couple pays more taxes as a married couple than they would if they were not married.
Marriage penalties often occur when the filing-jointly tax brackets and the standard deduction are not double of those when you would file alone. Currently, the standard deduction between a single taxpayer and those filing together is double. This means that there is currently no penalty for the standard deduction currently.
Another place people can get dinged with penalties is in the earned income tax credit. This credit is aimed to benefit low-to-moderate incomes. If you are married, the maximum earnings at which you can qualify for this credit are not doubled from the single filers, meaning that you may miss out on this credit.
The U.S. tax code is complex and confusing – from credits, to child and dependent care deductions, to qualifying for head of household – knowing all this lingo can be a lot. Understanding the implications marriage can have on your taxes is important.
There are many ways to benefit from or be hurt financially from how you decide to file once you are married. Understanding how two incomes and your filing status can affect your taxes is important to consider.