For couples who said “I do” during 2013, this tax season means they’ll file their first tax return as a married couple, which often triggers different phaseout limits and a new filing status. Even if you and your significant other walked down the aisle on Dec. 31, the Internal Revenue Service considers you both a married couple for the entire year.
Here's a look at what the newly married should consider as April 15 approaches.
Name changes. If you've changed your name, you need to alert the IRS and the Social Security Administration to avoid filing issues. Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block, recommends changing your name with the SSA first. "If you haven't done it and if you file your return using your married name, then the return is going to reject you from e-filing," she says. "Better to do it before the fact than after." Perlman also suggests that newlyweds adjust their tax withholding with their employer so it matches their new situation.
Tax pro vs. do-it-yourself return. If you're used to preparing your tax return on your own, you might not need an accountant or tax preparer to help now. But if your tax situation is more complicated – perhaps because your spouse works as independent contractor with a variety of income sources and deductions, or you've purchased rental property together – you might consider using a tax professional.
You might also want to consult a professional if you suspect your partner might be using some unorthodox tax-filing techniques, according to Matt Curfman, a certified financial planner and senior vice president at Richmond Brothers, Inc., a financial planning firm in Jackson, Mich. "Bringing in a professional and getting an outside set of eyes is an easy way to not muddle the water in the marriage if that is a concern," he says.
Filing status. If you're unsure which filing status will result in the lowest taxes, you could have your accountant run both sets of numbers or use an online calculator to estimate your tax bill under both statuses. In general, most couples should file as "married filing jointly," according to Perlman. "'Married filing separately' could be the worst of all because you get the lowest standard deduction, the lowest tax brackets and you can't take a number of tax credits or phase out of them early," she says. When filing a single return, both spouses must either use the standard deduction or itemize their deductions.
There are a few scenarios when it makes more sense to file separately. For instance, if one spouse is a low earner with a huge amount of medical expenses, that spouse could potentially deduct the cost of medical expenses that exceed 10 percent of adjusted gross income, according to Jane Bernardini, a partner at accounting firm Anchin, Block & Anchin. Otherwise, the spouse might lose the medical expenses deduction by filing jointly.
Another scenario has more to do with trust than the amount of the tax bill. "Sometimes one may be a little concerned about what the other is doing and not want to be involved in that person's tax return," Perlman says. "When you file jointly, you have what is called joint and several liability, which means if I sign that tax return and it turns out that my spouse is unfortunately cheating on his taxes, I'm liable, too."
This hopefully does not apply to newlyweds, but couples who are separated and not yet legally divorced may want to file separately. "There could be a long period between where you have separated but you haven't had a divorce decree," Curfman says. "You don't want to be dealing with tax issues from your ex-spouse a year later."
As for same-sex couples, the IRS ruled in August that they will be viewed as legally married for federal tax purposes. However, same-sex married couples who live in a state that does not recognize their marriage face a more complicated tax situation in which they must file as married at the federal level and separately at the state level.
Marriage penalty. Once you're married, you must file as married, not as a single person, but you can switch between filing jointly and separately depending on your situation each year. Filing separately does not protect you from the so-called marriage tax, which refers to the higher taxes some married, dual-earning couples pay versus what they would pay as individual wage earners. "The higher tax rates kick in at a higher level when you're single," Bernardini explains. "But when you're married and you add the two incomes together, the higher tax rates kick in at a lower income level."
Married couples also face lower phaseout limits on some tax credits. For instance, the child tax credit begins phasing out when an individual taxpayer's adjusted gross income hits $75,000 or higher. For married couples, the phaseout starts at $55,000 for a separate return or $110,000 for a joint return. However, married couples do get twice the standard deduction that individuals receive. For 2013, the standard deduction rate is $6,100 for individuals or $12,200 for married taxpayers filing jointly.
The marriage penalty is most common when both spouses are high earners with similar incomes. "In general, the closer together your incomes and the higher your incomes, the more likely you are to pay more tax as joint filers," Perlman says. "The more divergent your incomes, the more likely you are to pay less tax."
Not all married couples have to worry about higher taxes. Sometimes there's actually a marriage bonus, especially if one spouse isn't working. Marriage also makes it easier to transfer assets without triggering gift or estate taxes. Furthermore, married couples can take advantage of a spousal individual retirement account, so a nonworking spouse can save for retirement. As Perlman says, "you're in a new financial world now with the two of you.">