What Should I Ask My Accountant About……? Life Changes Part 1 – Marriage

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.

• Your tax bracket could be lower. If the taxpaying spouses have substantially different salaries, the lower one can pull the higher one down into a lower bracket, reducing their overall taxes.
• Tax shelter? Let’s say one spouse is losing money in a business.  Alone they may not be able to take advantage of some deductions. But, combine that with the income of a spouse who is making money, now those deductions may be available, and the loss could be a potential write-off.
• Marriage can protect the estate. Being married can help a wealthy person protect the assets they leave behind. Under federal tax laws, you can leave any amount of money to a spouse without generating estate tax, so this exemption can usually protect the deceased’s estate from taxation until the surviving spouse dies.

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:

• Married filing jointly
• Married filing separately

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:

• The child and dependent care tax credit
• The adoption credit
• The Earned Income Credit
• Tax-free exclusion of U.S. bond interest
• Tax-free exclusion of Social Security benefits
• The credit for the elderly and disabled
• The deduction for college tuition expenses
• The student loan interest deduction
• The American Opportunity Credit and Lifetime Learning Credit for higher education expenses
• Traditional IRA deductions
• Roth IRA contributions
• The capital loss deduction limit is $1,500 each when filing separately, instead of $3,000 on a joint return.

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:

• When you and your spouse combine the taxes due on your separate tax returns, the total is the same as or very close to the tax that would be due on a joint return. In this case, filing separately achieves the goal of maintaining separate responsibility for the accuracy of the returns and the payment of tax but without any additional liability.
• One spouse is unwilling or unable to consent to file a joint tax return.
• One spouse knows or suspects that the other spouse is omitting income or overstating deductions, and that spouse doesn’t want to be held personally liable for the other spouse’s tax or misrepresentations.
• The spouses live apart and at least one spouse would qualify for head of household filing status if they didn’t file together.
• One spouse owes child support. Filing separately can protect one spouse’s tax refund against the other’s creditor claims.

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.