TAX PLANNING FOR LIFE'S MAJOR'S EVENTS


Tax Planning for Newlyweds

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Talk about a party crasher: Uncle Sam is sure to be an uninvited guest at your wedding. You can count on your tax situation being high on the list of the things in your life that change when you tie the knot.

See Also: Tax Planning for Life's Major Events

The marriage penalty? Not so much. You've undoubtedly heard about the marriage-tax penalty, the quirk in the tax law that makes a married couple pay more income tax than they would have to if they remained single. Here's a little secret: Most married couples get a marriage bonus and pay less income tax than they would if each partner were single.

At issue is the graduated nature of the tax rates, which applies higher tax rates to higher levels of income. When you pile one income onto another on a joint return, it can push some of that income into a higher tax bracket.
Over the years, Congress has made important strides toward alleviating the marriage penalty. The top of the 10% and 15% brackets on joint returns are now precisely twice as high as the ceilings on single returns (they used to be less than double).

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As higher incomes fall into higher brackets, though, the breakpoints on a joint return aren't quite double the level on a single return. That could impose a marriage penalty, but it doesn't guarantee one. The more unequal the spouses' income, the more likely that combining them on a joint return will pull some of the higher-earner's income into a lower bracket. That's where much of the marriage tax bonus comes from — the fact that one spouse often makes much more income than the other. How you'll fare depends on how your income compares with your husband's or wife's.

Filing Status

If you do face a marriage penalty, you can't get around it by continuing to file as a single person. If you're legally married as of December 31, you're considered married for the full year and must file as either married filing jointly or married filing separately. The married filing separately status rarely works to lower the family tax bill. You can't, for example, game the system by having one spouse itemize and claim all the deductions while the other claims the standard deduction. Both husband and wife must either itemize or use the standard deduction. You can't mix and match.

Married Gay and Lesbian Couples

Same-sex couples married in any jurisdiction (worldwide) that permits such unions are now considered married for U.S. federal income tax purposes. So, for federal tax returns for 2013 and later years, such couples must file as either married filing jointly or married filing separately. Whether or not you’ll face a marriage penalty or enjoy a marriage bonus will depend on how your incomes compare, just as with other married couples. (If you were married in 2010, 2011 and/or 2012, you may file an amended federal return if it would prompt a refund, but you don’t have to. The window for filing a 2010 amended return closes April 15, 2014.)

Things are more complicated at the state level because most states that prohibit same-sex marriage do not recognize such marriages for state-income-tax purposes. See Tax Planning for Same-Sex Couples for more details.

Refine Your Withholding

Once you're back from the honeymoon, you and your new spouse need to check in with your bosses to adjust withholding from your paychecks. First, sit down with the instructions for the W-4 or a copy of IRS Publication 919, How Do I Adjust My Withholding?, to determine how many withholding allowances you deserve. As a couple, you should combine your income, deductions and credit information to come up with a single number of allowances to claim. Then you can divide them however you choose, recognizing that each allowance is worth more (in terms of reduced withholding and more take-home pay) to the higher-earner.

Unfortunately, many working couples have to worry more about underwithholding than overwithholding. The W-4 instructions have a special worksheet to take this into account by walking you through the process of eliminating allowances the other rules say you should claim.

Don't think of this as a punishment. The goal is to match withholding with what you'll actually owe for the year — so you get neither a big refund nor a nasty tax surprise when you file.

Coordinate Fringe Benefits

Speaking of your jobs, the new Mr. And Mrs. Joint Venture could open up some new opportunities to save. Draw up a list of the tax-favored fringe benefits at each workplace. If you can be covered by your wife's medical plan, for example, maybe you can trade your coverage for another benefit.

Alert Social Security of a Name Change

If you change your name when you get married, it's important to let the Social Security Administration know by filing a form SS-5. If the name on your tax return does not match the name Social Security has for your Social Security number, any tax refund you have coming will be delayed until the discrepancy is resolved. If you're up against the tax deadline and don't have time to change your name with Social Security, you can file a joint return with your husband using your maiden name (the one that matches your Social Security number) and then straighten things out in time for next year's filing season.

Selling a House

Once you're married, the amount of home-sale profit that can be tax free doubles from $250,000 to $500,000 — assuming you own and live in the house for at least two of the five years before the sale. But what if your new wife sold her house before the wedding so she could move in with you? What's the maximum exclusion that can be claimed on your joint return? Assuming your spouse meets the two-out-of-five-year tests for the house she sold, the $250,000 limit applies just as if she were still single. What if she sold after the wedding? Still, just $250,000 of the profit on the sale of her home can be tax-free. If both husband and wife sold individual homes in the year of the marriage, and both meet the two-of-five-year tests, each spouse can qualify for the $250,000 exclusion, bringing the total to the $500,000 married maximum.

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