First comes love.
Then comes marriage.
Then come two filing as one
When it comes to their taxes.
OK, "marriage" and "taxes" in my opening verse don't rhyme, which is why I'm a journalist, not a poet.
But since I focus on taxes and today is, so romantics tell me, the most important day of the year for couples, I thought I'd give the marrying of taxes and wedded bliss a try.
Here are five love and tax considerations.
1. Marriage date matters
Sure you marry for love. But you might want to consider when you formally tie the knot. It could affect your taxes, specifically your filing status.
The IRS generally considers you married for a full tax year based on your marital status on the last day of that tax year. So if you said "I do" on Dec. 31, in the IRS' eyes you were married all of the other 364 days (or 365 if, like 2020, it's a Leap Year), too. That means when you file your taxes the next year, you'll do so either by submitting one joint 1040 or by filing as married filing separately. More on these choices in #2.
Basically, your new marital status means new tax considerations.
I'm not saying taxes should be a main motivator in setting a wedding date, although it did factor into the day the hubby and I chose (are you really surprised?). You should, however, be aware of what marriage could mean for your first (and subsequent) tax filings together.
2. Filing status choices
Now about your new filing status. Every taxpayer has five from which to choose at tax time. The two that apply to married couples are married filing jointly (MFJ) or married filing separately (MFS).
Most couples use MFJ, combining their incomes and sharing deductions and credits on one Form 1040. MFJ is simpler, both for you and the IRS.
But ease isn't the only reason to file a joint return. Certain tax credits are available at a higher income limit for married filing jointly taxpayers or are only available to couples who use this one-1040 status.
In some cases, though, filing separate returns is a good call for a married couple. This could be the case if MFS results in one spouse owing substantially less tax than using the joint option. This might happen when one spouse had lots of medical expenses, but the couple's combined income produces an adjusted gross income percentage deduction threshold that's too high to meet. A common example is when one spouse had lots of medical bills, but a lower income, allowing that husband or wife to claim them by filing a separate return.
Sending the IRS separate returns also is a good idea if one spouse has some questions or concerns about claims his or her partner wants to make on a 1040. Remember that when you file jointly, each spouse can be held responsible for any tax bill (and penalty and interest) that the IRS might determine is due. This situation, known as joint and several liability, applies even if only one spouse earned all the income.
3. Possible marriage tax penalty or bonus
For many couples, getting married results in a lower tax bill compared to the single filing status. This tends to happen when one spouse earns significantly more than the other.
Couples that earn similar amounts, however, may wind up paying more combined federal and state tax. This is especially true for higher income earners.
The Tax Cuts and Jobs Act (TCJA) made many changes, but these so-called marriage tax penalty or bonus situations remain.
As with all things tax, marriage penalties and bonuses depend on your personal circumstances. But it's good to know how your vows affect your tax situation and explore possible options to ease any added tax costs.
If you can't, I doubt your married tax bills will change your decision to be together. After all, your vows did say for richer and poorer.
4. Bigger tax benefits for marrieds
There also are some specific tax benefits to being married, particularly if you're looking to sell your home or can afford to give away some of your assets.
When you sell your primary residence as a single homeowner, you can exempt up to $250,000 of gain from taxation. If you're married, your tax-free profit is in most cases $500,000.
Well-to-do and generous couples also get tax breaks in ways to whittle down a large estate that might eventually face federal taxation. Specifically, married couples get a bigger benefit from the gift tax exclusion. This is the amount each person can give to anyone else during a year without tax consequences. It's $15,000 per person for both the 2019 and 2020 tax years. But a married couple can combine the federal gift tax exclusion and give joint gifts of $30,000 to any one person.
5. When love fades
OK, I definitely don't what to douse today's romantic flames, but things, including relationships, change. And sometimes those changes are not for the best.
When that love light does dim, it could have some tax implications.
As with your wedding date, the timing of your marriage dissolution also matters. If your divorce decree is officially filed on Dec. 31, the IRS considers you a single person for the full year. This again affects your filing status again. You're either a single taxpayer now or if you have primary custody of any children from your marriage, you can file as head of household.
The TCJA also has changed the tax treatments of some divorce financial arrangements. For divorces effective in 2019 or later, alimony payments are no longer tax deductible for the payer. As for the receiving spouse, he or she now doesn't have to count the spousal support as taxable income.
If, however, your divorce was finalized pre-2019, you're grandfathered into the old system: alimony is still deductible, again as an above-the-line deduction, to the payer and still counts as income to the ex-spouse getting the payments. So be sure you have the paperwork showing the year of your marital split and, as long as they haven't made any modifications to that prior dissolution agreement, the amount paid/received for tax deduction/payment purposes.
Also note that there's no change to child support when it comes to taxes. Those amounts remain non-deductible for the paying parent and nontaxable to the parent receiving the payments on behalf of the divorced couple's children.
Happiest of Heart Day to all: I hope that this discussion of taxes and the dissolution of marriage wasn't too much of a downer. But I am a realist more than a romantic. That's saved the hubby so much Valentine's Day money over the years!
And speaking of the hubby, I hope that all you happy couples out there are like us. We're going into our fifth decade of shared Valentine's Days. Thank you, thank you (and patient him!) very much.
My gift to all you couples, married or just thinking about it, is a heartfelt wish that you enjoy each other's love and support on this Feb. 14 and every day.
And when you do exchange vows, you make the most of your marriage and tax savings for many, many years to come!
You also might find these marriage related posts of interest:
- Wedding and other tax tips for June
- 6 tax tips for divorcing (or divorced) couples
- When taxes get tangled up in spousal abuse