If you recently said “I do” — or you are planning to soon, taxes, and tax implications of marriage, might be the last thing on your mind. However, it is very important to sit down with your spouse (or your spouse-to-be ) to see how marriage will impact your taxes and your finances on a whole.
The first step is to be aware of what the Internal Revenue Service (IRS) needs. There are several requirements for newlyweds, but we will list a few of the key ones below:-
- Name Change: If newlyweds make any changes to their middle or last name, they need to notify the Social Security Administration immediately. If not, the IRS will be unable to match future tax returns that have the incorrect name on them.
- Change tax status with your employer: You should account for your new tax status on your W-4 by adjusting allowances, to ensure accurate withholdings.
- Address change: In addition to notifying the United States Postal Service (USPS) and the Department of Motor Vehicles (DMV), it is imperative that you update your address with the IRS. This can be done online by completing Form 8822.
Understanding the Tax Implications of Marriage
Now that you understand the requirements, what are the implications?
- Determine how you want to file: Once you get married, you can no longer file as “Single” and are now required to choose between — married filing jointly (MFJ) and married filing separately (MFS). In general, married filing jointly provides the most benefit because some tax credits are only available to married couples filing a joint return.
For standard deductions, married couples filing jointly can claim twice the amount that they would be able to — had they filed separate returns. In addition, filing one tax return will most likely involve less paperwork and usually costs less to prepare.
Which one is right for you? The IRS suggests calculating the tax outcome “both ways to find out which status results in the lowest tax.” Notably, if one spouse makes a significantly lower salary, he or she can bring the higher earner down into a lower bracket, reducing the combined tax burden.
- Select the right tax form: Some newlyweds may find that itemizing deductions will result in the lower tax bill (compared to taking the standard deduction). If so, they should now use Form 1040, not Form 1040A or Form 1040EZ.
- Understand the IRA benefits: One major benefit of filing jointly is that each spouse can make tax deductible Individual Retirement Account (IRA) contributions provided that at least one spouse earns a taxable income. For 2016, the IRS states that in order to qualify for this tax deduction, the maximum you can contribute to your traditional and Roth IRAs (including a spousal IRA) is “$5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit.”
Worrying about money and taxes can take a toll on any relationship. However, by addressing the tax changes that occur as a result of marriage now, it will save you time and potentially reduce stress later when tax season rolls around.
Need more advice? If you are a small business owner who has recently married or experienced another life changing event, contact the RQB team today for more information.