Marriage vows rarely include the words "do you vow to love, honor and agree to file a joint tax return? But one of the major changes that occur when you get married, besides the end of your single life, is your tax situation and there are some important things to consider that will impact how much you will pay in taxes including whether to file jointly or separately.
Fortunately, Smart Money has collected a few important things you need to know.
Let's say you're going to get married before December 31 of this year. That's what my wife and I did, not thinking about taxes whatsoever. However, when we filed the following April out accountant said you realize that getting married on the day before New Year's Eve means you have been married for all of that year and not just the last two days.
What that meant for us was our combined income put us into a higher bracket and we had to pay a few thousand dollars more in taxes than if we'd waited three days to get married.
So the first thing to be aware of is that your marital status on December 31 determines your tax filing options for the entire year. If you're married at year-end, you have two choices. You can file jointly with your new spouse, or use the "married but filing separate status for a separate return based on your income and your deductions and credits.
Guess what? Most married couples file jointly. Two reasons, it's simpler and often cheaper. 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. It can be cheaper because using the 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.
The downside is that if you file jointly, you're responsible for any tax mistakes or misdeeds your spouse may be involved in.
Joint and several
When 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.
However, if you file separately, you have no liability for your spouse's tax problems intentional or not. So, if you have any doubts about your new spouse's financial ethics in general and their attitude about paying taxes in particular, you may want to seriously consider filing separately. It may not be as romantic but there are no line items in the tax code for romance.
Marriage penalty
The other major question you want answered is will the marriage penalize or reward you at tax time? Some couples will have to pay what's known as "the marriage penalty." It's when joint-filing couples owe more federal income tax than if they had remained single. 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, in which case you get the "marriage bonus. So if you and your spouse both earn healthy and fairly equal incomes, you could be hit with the marriage penalty. If not, you'll likely collect the marriage bonus.
Finally, what happens if you and your spouse both own homes? According to Smart Money, 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.
On the other hand, one could sell his or her home and both move into the other's house. 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. Smart Money calls that good tax planning.
For more information on the tax implications of getting married check out IRS Publication 504 which has the unfortunate title "Divorced or Separated Individual because it has as much to say about getting married as getting divorced or separated.
Another argument for tax reform.
