This is the first article in a ten-part series about life changing events you should speak to your accountant about.
New life developments can be exciting, but they also change every aspect of your finances. When you experience a life-changing event, your cash flow and tax bracket are probably the last thing on your mind. Consulting an accountant during significant life changes can prevent common mistakes and set you up for success.
So, let’s talk about marriage. Did you know 2.3 million couples wed every year in the US? Hopefully the majority of these couples married for true love and compatibility, but some of these tax breaks might have made tying the knot seem a little more appealing.
So, let’s go back to the love and compatibility scenario. Filing your income tax return with the IRS can be quite the hassle, and for newlyweds especially, there is a lot to consider—most importantly deciding whether to report your income together or separate.
A newly married couple has two choices for their filing status:
There are many advantages to filing a joint tax return with your spouse. The IRS gives joint filers one of the largest standard deductions each year($24,400 in 2019), allowing them to deduct a significant amount of their income immediately. Joint filers mostly receive higher income thresholds for certain taxes and deductions—this means they can earn a larger amount of income and potentially qualify for certain tax breaks.
Couples are eligible to file a joint return as long as they are married by December 31st, the last day of the tax year. So, you can file a joint 2019 return in April 2020 if you were legally married on Dec. 31, 2019.
By not choosing to file jointly, most couples are subject to the following tax consequences.
Couples who file separately receive few tax considerations. Separate tax returns may give you a higher tax with a higher tax rate. The standard deduction for separate filers is far lower($12,200 in 2019) than that offered to joint filers.
If you file a separate return from your spouse, you are automatically disqualified from several tax breaks and deductions such as:
However, there are some cases in which to consider filing a separate married return. Filing a separate married return provides relief from joint liability. Each spouse is only responsible for the accuracy of their own separate tax return and for the payment of any separate tax liability associated with it.
Here are some situations in which filing separately may be advantageous:
Experts recommend preparing your taxes both ways to determine which option makes the most financial sense for you if you’re unsure what’s best for your personal situation.
So, should I speak to my accountant before I get married?
Absolutely! Everyone’s tax situation is different and can be complex. In most cases, the financial benefits of filing a joint tax return will outweigh filing separately, but it is important to know and understand.
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