Tax tips for newlyweds from five experts
Not paying attention to how marriage changes your tax picture can hit newlyweds in the bank account for years after a wedding.
But right around the bend is another hurdle to clear, and this time mom and dad may not be pitching in.
The hurdle is taxes, and not paying attention to how a marriage changes your tax picture can hit newlyweds in the bank account for years after a wedding.
“When a major life change happens, taxpayers need to know it could impact their tax situation,” explains Kathy Pickering, executive director of The Tax Institute at H&R Block. “Not understanding the impact of the resulting tax changes to the individual and household can be costly.”
What steps should newlyweds take to maximize their tax situation in marriage, especially in those all-important early years of matrimony?
Here’s what our panel of experts had to say:
Tiffany Washington, founder of Waldorf, Md.-based Washington Accounting Services
The most important issue is to decide whether newlyweds should file jointly or individually. Most couples are better off filing jointly, particularly if there's a wide gap in incomes.
It's important to get this right.
When two salaries are averaged, the lesser of the two could sink the higher one into a lower tax bracket, saving both spouses money. Many people are aware of the “marriage penalty,” a fine leveled at some wedded couples, but it applies only to couples earning two relatively high salaries (a combined income of more than $131,450), which might bump them into the 28 percent tax bracket. When a couple has that much money coming in, submitting separately could be the way to go, because averaging the incomes won't help.
The other common reason to file separate returns is when writing off medical expenses. To be deductible, these expenses must add up to more than 7.5 percent of adjusted gross income, an amount that's easier to achieve filing solo.
Lynn Ballou, CFP and managing partner at Lafayette, Calif.-based Ballou Plum Wealth Advisors
Some good tax planning opportunities do exist for newlyweds.
For example, if one spouse is self-employed while the other is a W-2 earner, you may be able to shift the income tax burden to the spouse with the systematic paycheck. Do that by increasing that spouse’s withholding and live on the income the self-employed spouse brings home, thus avoiding the fun of estimated taxes. And if only one spouse has a pretax plan for paying for medical insurance premiums, you can switch coverages to that spouse’s plan.
It’s also important to coordinate participation in IRAs and other retirement plans such as Roth IRAs based on income thresholds. You’ve got to earn less than $188,000 if married and $127,000 if single to be eligible to fund your Roth. Just because you qualified for the contribution as a single person, don’t just assume you can continue to contribute now that you are married.
Matt Armstrong, a financial adviser (and a newlywed) at Rockford, Ill.-based Savant Capital Management
The best advice for newlyweds is to review your filing status, exemptions, income and withholding during the year you are marrying, the earlier the better. This will give you time to tweak your exemptions, increase or decrease the amount of federal tax coming out of your check with a smaller impact on your monthly cash flow and help avoid that April 15 surprise.
More specifically, tax situations that exist as single taxpayers can occasionally create adverse consequences as a married couple, leaving the tax preparer doubling as a marriage counselor.
Just remember: The past year is done. It cannot be changed. So if your new spouse made $30,000, had minimal withholding and you now owe $4,000, outside of burning up cash flow to contribute to an IRA or HSA you may qualify for an installment agreement (See IRS Form 9465) that will spread the payments over a year or more. Focusing on the obvious can create undue harm to a new marriage; instead, focus on the changes to the current year that can help you avoid the same outcome next year.
Paul Gevertzman, partner at accounting firm Anchin, Block & Anchin in New York City
Taxes on homes owned is a big issue.
For instance, if a home is sold as a result of combining two households, newlyweds may be eligible to exclude some or all of the gain. If the seller owned and used the home as a main residence for at least two of the past five years before selling it, usually the seller can exclude some or all of the gain from taxable income. The maximum exclusion is $250,000, but for joint filers it can be up to $500,000 if they meet all three of these tests:
- 1. Either one of the spouses meet the two-out-of-five-year ownership requirement.
- 2. Both meet the two-out-of-five-year ownership requirement as a principal residence test.
- 3. Neither excluded the gain from a sale of a residence in the two years prior.
Barbara Weltman, author of J.K. Lasser’s 1001 Deductions and Tax Breaks 2013.
Newlyweds should take the following key tax steps right after they get married:
- Notify the IRS of any change of address (Form 8822).
- Contact the Social Security Administration if one or both spouses changes a name. This will ensure that earnings for purposes of Social Security and Medicare taxes are properly credited.
- Adjust withholding on wages (file a new W-4 with the employer) if necessary so the couple is not over- or under-withheld.
- Adjust fringe benefits (for example, it may be possible for one spouse to forgo employer-provided health coverage if the other spouse’s employer offers coverage for both so the spouse without employer coverage can get other types of employer-paid benefits).
- For estate tax purposes, it may be important to protect assets for children of a prior marriage. Even though the estate tax exemption amount may be sufficient to shield most estates from taxation, the use of trusts and other arrangements may be advisable in second marriages.