While the road to a marriage license is certainly paved with shopping for diamond rings, scouring Pinterest for centerpiece ideas and planning the Caribbean honeymoon of your dreams, it is important to also sort out the finer logistics of tying the knot. Like it or not, finances will undoubtedly be a large component of your happily ever after, which is why it is best to be on the same financial page with your beloved before walking down the aisle.
Here are three of the most important tax considerations to review before getting married:
Filing Taxes Jointly or Separately
One of the most prominent ways that marriage affects a couple’s taxes is the filing status. Regardless of the time of year you get married, if you are married on Dec. 31, 2017, you are considered married for all of 2017 in the eyes of the IRS. The common route is to then file taxes jointly, i.e., report your combined earnings and deductions. Here are few reasons why filing taxes jointly is usually the preferred option:
- Couples receive lower tax rates and are eligible for desirable credits, such as child care credit, higher education credits, etc.
- When filing separately, you cannot take your standard tax deduction for student loan interest and receive a smaller IRA contribution deduction.
- The process is much more straightforward when there is only one tax form to worry about.
Of course, each path has its own set of pros and cons. Here are a few cases when it would be wise for a married couple to file separately instead:
- When filing jointly, each individual is entirely responsible for their spouse’s tax issues. If your spouse has unresolved tax problems or is not honestly reporting their taxes, you would be held liable.
- If one spouse has high medical expenses, couples may owe lower taxes if filing separately.
Change in Tax Withholding
A couple’s new joint income may push them into a higher tax bracket. Just because each of your individual incomes stays in one tax bracket, it does not necessarily mean that your joint income will also be in that same bracket.
For example, individuals who make less than $37,650 only have to pay 15 percent in taxes. However, married couples need to pay 25 percent in taxes once their joint income surpasses $50,401. So if both spouses have salaries of $35,000 each, they would pay 15 percent individually, but 25 percent combined.
Should your joint income bump you into a higher tax bracket, it is imperative to provide your employers with new W-4 forms that reflect the necessary change in withholdings.
Home Buying and Selling
The process of moving into “home sweet home” often involves one or both of the spouses selling the home they lived in prior to getting married. Before deciding to sell a home, get acquainted with the gain exclusions associated with selling a house as a single person versus selling a house as a married couple.
The amount of gain exclusions a single person can claim when selling a home can be up to $250,000. This amount doubles when a married couple is selling a home, i.e., you would receive a total of up to $500,000 in gain exclusions. However, there is a slight catch. A married couple must live in a home together for a minimum of two years before selling it to receive the $500,000 gain exclusion.
Preparing for the rest of your financial lives together can be daunting at times. Let Yeater & Associates, CPAs and accountants handle the nitty gritty tax planning and preparation details so that you can focus on the happily ever after. Contact our qualified team to start planning your future today.