5 Things to Know about Taxes When You Get Married
Updated: Jun 19, 2020
Today's blog is a guest post by Chris Wittich, MBT & CPA at Boyum Barenscheer in Bloomington, MN.
**Note: All Woodland Events full and partial planning clients get a free tax consultation with Chris to help prepare for filing taxes as a married couple.**
Getting married is certainly a huge life changing event and any time you have a life changing event it's a good idea to take a look at your tax situation and see if there are opportunities for saving tax dollars or tax challenges coming your way. So here are 5 things to keep in mind when you are getting married.
1 - don't necessarily change your withholding at work from single to married
At your job you fill out a W-4 to indicate how much withholding you want taken out of your paychecks by your employer. The IRS form guides you to indicate whether you are single or married and how many dependents you have. The form leads you to believe that you should put married with two exemptions when you get married, but that is not what you want to do if both spouses are working. The way those withholding tables work is that when you put married it basically assumes that is all of your income for the year, from that one job. In essence the table assumes that your spouse does not work. So if both spouses do work and then you both put married your joint income will be much higher than the table anticipated and you'll end up owing money. Sometimes even quite a bit. So if both spouses are working I would recommend leaving both spouses as single with one exemption.
2 - look at whether or not you will be itemizing your deductions
Getting married is often right around the time when you buy a house, or perhaps one spouse already owns a house and anytime a house is involved you should be looking at whether or not you are going to itemize your deductions. For the federal return a joint couple can claim a standard deduction of $24,000 in 2018. Those itemized deductions can include up to $10,000 in state income taxes and property taxes plus your total amount of mortgage interest and charitable contributions. So if the tax deductions are limited to $10,000 that leaves $14,000 for the mortgage interest and the charitable contributions. If the mortgage interest + charity is more than $14,000 you'll itemize and want to keep close track of your charitable receipts. If the amount is going to be less than the standard deduction on your joint return you should be keenly aware that your mortgage interest is not tax deductible and plan accordingly.
3 - take advantage of potentially lower tax brackets
Filing a joint return can have tremendous tax savings if one spouse is working and the other is not, or if one spouse makes a great deal more than the other. Filing a joint return basically doubles all the tax brackets that exist for a single person so the higher earning spouse might now have the opportunity to realize capital gains at a lower tax rate or realize capital gains without paying the net investment income tax. Being aware of where those tax bracket breaks are and new opportunities for accelerating income into a newly found lower bracket can result in lots of tax savings just through good planning.
4 - look at the effect your joint income will have on tax credits
There are many tax credits that could apply to a taxpayer like the child tax credits or education tax credits or daycare tax credits. Each of those credits has it's own phaseout and thresholds for when a taxpayer can claim a credit and when it goes away because your income is too high. Sometimes combining your income on a joint return will cause your income to go over those thresholds and you'll lose out on a tax credit. As an example the American Opportunity Tax Credit is one of the education tax credits and it phases out when your modified adjusted gross income is more than $90k for single people and $180k for married. So a single person with $80k of income gets a $2,500 American Opportunity Tax Credit but a joint couple with $200k of income gets nothing. If you think married filing separately will help it won't with the tax credit because married filing separately makes you ineligible for the tax credit.
5 - think about filing separately
Generally speaking it's usually a tax savings to file a joint return, but that's not always the case. With the thresholds and phaseouts for things like the QBI Section 199A deduction it could be beneficial to file separately, especially when the two spouses have similar income levels. The other thing to be aware of when filing a joint tax return is that by signing and filing a joint tax return both individuals are subject to a joint and severable tax liability meaning one spouse can be held liabile for the tax liaability of the other. So if one individual has a simple W-2 job and the other has complex business dealings and might owe a significant amount of tax then perhaps the individual with the W-2 job will want to consider how well they understand the tax positions that are included by the spouse with the more complex situation. It's worth mentioning that after getting a divorce, both individuals can still be held liable for the tax liability that was on a jointly filed tax return.
Chris Wittich began his CPA career in 2007 at Boyum Barenscheer and quickly made his mark in the firm’s tax department. He completed his MBT degree from the University of Minnesota in 2008. He works with individuals, businesses, trusts and estates, and expats providing tax planning and tax compliance services. Chris enjoys challenging research projects as well as training others in ‘all things tax’. His passion for educating others is evident as he is the firm’s most prolific website blogger. Chris grew up in Eden Prairie, Minnesota but now lives in Eagan with his wife Brittany and cat Cornelius. In his spare time, Chris is busy playing golf or Ultimate Frisbee.