Advising the Millennial Part II: Tax Impacts of Marriage

Marriage can cause significant changes in the amount of taxes you owe. The amount of tax a couple owes at the end of the year may go up or down after getting married, even if their income and deductions remain the same. Here are a few things to consider regarding your taxes after tying the knot.

  1. Marriage According to the IRS

For tax purposes, if you get married at any point during the year, the IRS considers you to be married for the entire year. This means that if you are legally married on December 31, you cannot file using the Single filing status – you must use the Married Filing Jointly (MFJ) or Married Filing Separately (MFS) status for the tax year.

If you changed your name after getting married, you should report the name change to the Social Security Administration by filing Form SS-5. Make sure to do this well before you file your tax return to ensure that the SSA has enough time to update their records and inform the IRS.

  1. The Marriage Penalty

You may have heard that married couples sometimes pay more tax after getting married than they did when they were single. This is referred to as the “marriage penalty”. This usually occurs when both taxpayers earn similar amounts of money before and after marriage. The marriage penalty can occur for several reasons.

One reason that the marriage penalty exists is that the tax brackets for married couples filing jointly are not always double the amount of the tax brackets for single filers. When a couple’s income is combined, some of their income may therefore end up in a higher tax bracket than if they were single. The amount of their income that falls into the higher tax bracket will be taxed at a higher rate, which raises their average tax rate. Taxpayers that qualified for the Head of Household filing status when they were unmarried may incur an even greater penalty than those who used the Single filing status since the Head of Household tax brackets are even more favorable.

Thankfully, the Tax Cuts and Jobs Act that went into effect in 2018 will eliminate this penalty for many taxpayers. In 2017, only the 10% and 15% tax brackets for the MFJ filing status were exactly double the Single filing status tax brackets. In 2018, the new 10%, 12%, 22%, 24%, and 32% brackets for the MFJ filing status are exactly double the brackets for the Single filing status. In other words, you will not incur a marriage penalty due to differences in tax brackets unless you have a combined income above $400,000.

Other taxes, such as the Net Investment Income Tax and the Additional Medicare Tax on Wages, also have a marriage penalty. The Net Investment Income Tax is a 3.8% tax on investment income, but it only affects taxpayers with modified adjusted gross income over a threshold amount. Single taxpayers with modified adjusted gross income over $200,000 get hit with the tax, but married taxpayers that file jointly must pay the tax if their combined modified adjusted gross income is over $250,000. The Additional Medicare Tax on Wages is an add-on tax of 0.9%. It affects taxpayers with wages, self-employment income, or railroad retirement compensation over a threshold amount. For single taxpayers, the threshold is $200,000, while for married taxpayers that file jointly the threshold is $250,000.

Some tax benefits also have a marriage penalty. These benefits have different phaseouts for joint and single taxpayers. A phaseout is when a tax benefit is reduced and eventually eliminated when a taxpayer or taxpayers have income above a certain threshold. If the phaseout for joint taxpayers is not double the phaseout of single taxpayers, a marriage penalty may occur. Examples of tax benefits that have marriage penalties built in to their phaseouts are the Earned Income Tax Credit and the Child Tax Credit.

If there is a large difference between the earnings of the spouses before and after marriage, they may pay less tax after getting married. This is referred to as the “marriage bonus”. For example, if only one spouse earns money, the couple may benefit from the higher brackets, thresholds, and phaseouts for joint taxpayers mentioned above, even though they are not double those of single taxpayers.

  1. Married Filing Jointly vs. Married Filing Separately

Many married taxpayers wonder whether they would save money by filing separately. However, the married filing joint filing status is usually more advantageous. Determining which filing status is better is a complex calculation that can be done using tax software. However, the following is a non-exhaustive list of reasons why the MFJ filing status is usually the better option:

  • Married couples filing separately do not get the more favorable single taxpayer tax brackets. The tax brackets are exactly half of those for married couples filing joint.
  • Certain tax credits, such as the American Opportunity Credit, Lifetime Learning Credit, Earned Income Credit, and Child Care Credit are not available to married couples filing separately.
  • Certain deductions, such as the Tuition and Fees deduction and the Student Loan Interest deduction, are not available to married couples filing separately.
  • For married couples filing separately, Roth IRA contributions are phased-out from $-0- to $10,000 of adjusted gross income if the spouses lived together during the year. This makes it almost impossible to contribute to a Roth IRA.
  • The phaseout for Traditional IRA contribution deductions for married couples filing separately is from $-0- to $10,000 if the spouses lived together during the year and the taxpayer or spouse is covered by a retirement plan. This makes it almost impossible to get a deduction for Traditional IRA contributions.
  • When filing separately, both spouses must either itemize their deductions or take the standard deduction. This prevents couples filing separately from taking more deductions that they would if they filed jointly.

There are some situations were a couple may want file separately:

  • If you file a joint return, both spouses are jointly and severally liable for the taxes owed on the return. This means that the IRS can collect taxes due from either spouse. Couples that prefer to keep their finances separate for financial or legal reasons may prefer to file separately, even if they end up paying more tax.
  • Certain deductions are subject to thresholds based on your income. For instance, taxpayers can only deduct medical expenses to the extent they are higher than 7.5% of their adjusted gross income in 2018 (this threshold will revert to 10% in 2019). If one spouse has significantly lower income than the other but has very large medical bills, it may be better to file separately to take full advantage of the deduction.
  • Parents can only claim their married child as a dependent if the child files separately from the spouse. The parents may save more in taxes by claiming a child as a dependent than the child can by filing a joint return. For example, if the child and his or her spouse are still in college and not earning much money, their benefit from filing a joint return may be less than the benefit to their parents can get from claiming them as a dependent. The child will still need to meet all the requirements to qualify as a dependent.
  • If one spouse owns a small business, it may be advantageous to file separately to take advantage of the 20% deduction of Qualified Business Income. The phaseout threshold for this new deduction is $315,000 of taxable income for couples filing jointly and $157,500 of taxable income for all other filers. If the spouse that owns the business would be under the phaseout threshold when filing separately but not when filing jointly (e.g., when the spouse that does not own the business earns significantly more money), the couple’s overall tax bill may be lower when filing separately.

 

  1. Withholding and Estimated Payments

After you get married, you may want to give your employer an updated W-4 and state withholding form, or consider recalculating your quarterly estimated tax payments if you are an independent contractor. Even if you will not be affected by the marriage penalty, the amount of tax due when you file your return may change from when you were single. If you don’t change the amount that you withhold from your paycheck or pay in estimated taxes, you may end up owing money or having a significant overpayment when you file your taxes.

Taxes are probably not the biggest concern for most people when they decide to get married. However, giving some thought to these issues before and during your first year of marriage can help you avoid surprises when you file your return and help you plan for the future.

If you have any questions about the information provided in this article, please contact us.

© 2018


Written by: Michael R. Ioffredo, CPA

Michael Ioffredo

 

Michael is a Tax Senior at Thompson Greenspon specializing in pass-through entity, trust and estate, and individual taxation.

Michael is a Certified Public Accountant in Virginia, and holds an Accounting Certificate from George Mason University, a JD from the William & Mary Law School, and a BA in Psychology from the University of Virginia.

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