The Effect of Marriage on Your Taxes

When planning a wedding, taxes are likely the last thing on your mind. However, once the honeymoon is over, it’s time to consider them. Transitioning from filing as a single person to a married couple can bring significant changes. Many non-accountants assume that married couples are either penalized or rewarded come tax time, but the reality is more nuanced. There are both tax benefits and pitfalls for married couples, and it’s important to understand how getting married will impact your taxes in straightforward terms. Here are 12 key points worth considering:

Marriage doesn’t necessitate filing a joint tax return. The IRS provides two filing statuses for married couples: married filing jointly and married filing separately. While most couples benefit from filing jointly, there are situations where filing separately makes more financial sense.

For instance, combining incomes could lead to higher monthly student loan payments for those on income-driven repayment plans. It could also limit flexibility in deducting medical expenses. The IRS allows taxpayers to deduct medical costs exceeding 7.5% of their adjusted gross income (AGI), and filing jointly raises this threshold.

Some couples opt to file separately in years with high medical bills because the 7.5% threshold decreases on one income if only one person paid a substantial amount of medical expenses. However, consider the trade-offs involved, such as potential differences in income tax brackets, loss of eligibility for deductions, and even tax credits. Compare the implications of filing jointly versus separately carefully, as changing your tax status can have several implications that may harm more than help. If you need assistance making this decision, consult a tax professional.

If this seems like common sense, that’s because it is. Filing a single tax return is more cost-effective than filing two separate returns. While the savings might not be significant for young couples with straightforward tax situations, for older couples navigating more intricate tax scenarios, the potential savings could easily reach hundreds of dollars.

How much exactly? In 2020, the National Society of Accountants crunched the numbers. Independent contractors with itemized deductions, investment income/losses, and rental income/losses paid an average of $726.

Contributing to an Individual Retirement Account (IRA) typically requires earned income of some form, usually derived from employment. However, this stipulation doesn’t apply to married couples. If one partner is unemployed or stays at home, the other can still make a full IRA contribution for the year. This flexibility can be particularly advantageous for married couples with significant income disparities.

Married couples filing jointly with traditional IRAs can claim a full deduction for up to $103,000 of combined income. For those with Roth IRAs, while the benefits accrue in the long term (i.e., during retirement), they are nonetheless substantial.

Let’s start with SALT, which stands for “state and local taxes.” These taxes can be deducted from federal income tax filings, with an individual deduction capped at $10,000. Unfortunately, married couples face the same cap, regardless of whether they file jointly or separately.

For married couples filing separately, the individual SALT cap is $5,000. This can significantly impact two high earners who tie the knot or a single high earner, as their maximum SALT deduction decreases. However, for most others, the SALT cap shouldn’t be a concern. If you opt for the standard deduction, it’s not even something to consider.

High earners and residents of high-tax areas are most affected by this rule change, implemented during the tax reform of 2018.

Thanks to the CARES Act of 2020, it’s easier to receive tax benefits for charitable donations. Individuals can deduct up to $300 in cash donations, meaning married couples can realize a $600 tax deduction.

Here are a few key points: the charity must be recognized by the IRS, this deduction can be taken alongside the standard deduction (without itemization), cash donations are required (property, time, or items don’t qualify), and unless Congress intervenes, this deduction will expire after the 2021 tax year.

This one’s simple math. Those who itemize deductions can generally write off up to 50% of their charitable donations (money or property), with some limitations applying in certain cases. When you get married and file jointly, your income increases, potentially boosting your maximum tax deduction for charitable contributions.

While it may seem to favor the wealthy, there are benefits for average earners too. Donating a car to charity, for instance, could lower a couple’s tax bill by several thousand dollars, potentially making them eligible for adjusted gross income (AGI)-based tax incentives.

The Earned Income Credit (EIC) is aimed at reducing the tax burden of low and moderate earners, taking into account income, the number of children, and investment accounts. For single filers without children, the maximum income to qualify for the EIC in 2021 is $21,430. For married couples, this threshold rises to $27,380.

This means many married couples may find the EIC out of reach. Even those with children don’t fare much better. A single parent with three children qualifies for the EIC with an adjusted gross income (AGI) of up to $51,464, compared to just $57,414 for married couples.

Note: Married couples filing separately can still claim this credit under certain conditions, although this seems to be a temporary exception for 2021.

In specific circumstances, you could be held liable for your spouse’s tax debt. Fortunately, any tax debt incurred before your marriage remains your spouse’s responsibility. However, if you file jointly while married or separated but not legally divorced, any tax debt owed by your spouse becomes joint responsibility.

To mitigate this risk, consider filing separate tax returns. This isn’t just for couples in precarious financial situations—regular couples can benefit too, safeguarding one spouse’s refund from being seized to pay the other’s tax debt. Remember, the IRS prioritizes debt repayment over issuing refunds, potentially reducing one spouse’s refund to settle the other’s debt. Depending on the circumstances, filing separately could be wiser to protect the refund.

It’s crucial to understand that the timing of your marriage is irrelevant to the IRS. Whether you tie the knot on January 1st or December 31st, your tax filing status for the entire year is “married.” This is noteworthy because most married couples typically have higher combined incomes, making it harder to optimize certain deductions and qualify for certain tax credits.

While postponing a wedding for tax reasons may seem unromantic, it could be financially prudent for some couples. Consider all factors before deciding, as marrying before the New Year could result in greater tax savings through wider income tax brackets, especially if one spouse earns significantly more than the other. Filing jointly may allow the higher earner to shift some income into lower tax brackets, potentially reducing overall tax liability.

Married couples may face higher Medicare taxes. The individual Medicare tax rate is 1.45% for employees and 2.9% for the self-employed (although the IRS allows a deduction for half of this for self-employed individuals, reducing the effective tax rate). For single taxpayers earning over $200,000 annually, this rate increases by 0.9%. However, for married couples, the income threshold isn’t doubled; instead, it’s set at $250,000.

While this might not seem like much, it significantly raises the Medicare tax burden for married couples. For instance, a couple with a combined income of $249,000 would owe $3,610 in Medicare taxes, while a couple earning $250,000 would owe $5,875. This results in what’s commonly referred to as a “marriage penalty” in taxes.

Suppose your spouse ventures into business and experiences a challenging first year while you remain in the corporate sector. If you file jointly, their business losses can potentially lower your collective taxable income, potentially resulting in a larger tax refund for you both.

However, it’s important to note that this applies only if your spouse’s business reports a loss. Additionally, carefully consider whether filing jointly is the best option in such a scenario. A struggling business may accumulate debt, and filing jointly means this debt becomes shared between you and your spouse.

In 2021, the maximum standard deduction for an individual is $12,550, while for a married couple, it’s $25,100. While this may seem advantageous, the combined standard deduction isn’t necessarily the maximum a couple can claim. If a couple lives together and shares parenting responsibilities for a child, getting married may actually result in a lower total standard deduction. This occurs when combining the standard deduction with the head of household standard deduction. The “head of household” status can only be claimed by a single filer who supports a qualifying dependent, which includes children, family members, relatives, and foster children.

For 2021, claiming head of household status increases the maximum standard deduction to $18,800. When combined with the standard deduction of $12,550, the total deduction amounts to $31,350. While marriage offers various tax benefits when filing jointly, maximizing the standard deduction isn’t one of them.

Marriage alters your tax filing status and eligibility for credits and deductions. However, this shouldn’t dissuade you from getting married. At most, taxes might delay your wedding until the following tax year. Typically, couples should evaluate whether filing jointly or separately is more beneficial. As with any financial decision, thorough research and consultation with a professional are recommended before making any decisions.