How Marriage Will Impact Your Taxes
- September 25, 2020
- by Michael
Congratulations on getting engaged (or married)! As you begin to share every aspect of your life with your partner, it is important to anticipate financial changes. Specifically, here we outline changes in how married couples file their taxes.
Everyone wants to maximize their tax returns, and married couples are no exception. In fact, you might have specific goals as a couple for how you want to use your tax return to set yourselves up for a strong financial future.
Here are eight things to consider when filing your taxes as a married person.
Your Filing Status Will Change
When you get married, you can choose how you want to file your taxes. Your options are:
- Married filing jointly (MFJ)
- Married filing separately (MFS)
If you choose to file jointly, your tax rate is typically lower. There are cases where married filing separately saves a bit of money. Your CPA or tax preparation software will recommend the best option.
Marriage May Lower Your Tax Bracket
Filing jointly may change your tax bracket for the better. Several years ago, there was a ‘marriage penalty’ in which when spouses with similar incomes filed jointly, they were pushed into a higher tax bracket than when they were single. Congress has made changes that now incentivize married couples to file jointly. Depending on the income of each person, a couple may still be pushed into a higher tax bracket, but if the couple has substantially different salaries, the higher-earning partner may be pulled into a lower tax bracket. This would then reduce the couple’s overall taxes.
Your Tax Withholding on Your W-4 Will Change
After you’re married, you and your spouse will need to adjust the tax withholding from your paychecks. Many working couples choose to withhold the incorrect amount. This can cause you to overpay on your payroll withholding taxes and get a large refund at the end of the year. A tax professional can advise you on how much you should withhold on your W-4.
Your Deductions May Change
You and your spouse will need to decide if you should itemize your deductions or move forward with the standard deduction.
For 2020 the standard deduction for individuals is $12,400. For married couples filing jointly it doubles to $24,800. Itemized deductions only make sense if they add up to above your standard deduction.
Some common itemized deductions include:
- Home loan interest
- Student loan interest
- Medical expenses exceeding 7.5% of your adjusted gross income
- Earned Income Tax Credit
- Child and Dependent Care Tax Credit
- Education Credits
- Adoption Credit
- Charitable donations
Estate Planning Changes
Being married can help a protect the assets you plan to leave to others in your will. Often when properties or assets are gifted, there is an estate tax. However, the law states that you can leave any amount of money or assets to a spouse tax-free. This helps to protect the value of the person’s accounts when they die. See more in our article on estate planning basics for couples.
It May Change How You Buy or Sell Real Estate
When you are married, your combined income may allow you to purchase a home. You may also want to sell a home or homes that were purchased before you got married. If you own a home, the interest that you pay on your mortgage is an itemized deduction on your tax return (assuming you have enough itemized deductions to go above the standard deduction).
If you decide to sell a home, the deductible capital gains double from $250,000 to $500,000 for married couples. However, if you owned the home before you got married, the $500,000 exclusion only applies if you both lived in the home for at least two years. This is especially important for newlyweds to keep in mind.
You May Need to Change Your Name with Social Security
You file your taxes using a Social Security Number. If you change your name after marriage, you need to make sure that the Social Security Administration is aware that your Social Security Number will match a new name. The Social Security Administration will need to file this change before you can file your tax return, so it is advisable to make this change as soon after marriage as possible to avoid any issues during tax time.
Marriage May Affect How Long It Takes to Do Your Taxes
If you choose to file jointly, it may take you half as much time to file your taxes. If all you must do is gather each of your paperwork and input your information, your taxes will be much easier to file jointly. If you choose to file separately, you will each have to complete the entire tax filing process.
The Bottom Line
You and your spouse will likely want to maximize how you use your tax return. You can choose to spend it on setting a foundation for your life together or save it for retirement. However you choose to use your money, a tax professional can help you to make sure you get the highest possible tax return, and a financial advisor can help you make the best money moves as a newly married couple.