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There’s an old song that says love and marriage go together like a horse and carriage. But the lyricists left out a crucial item: taxes.
Marriage can change your life in untold ways, not the least of which is its effect on your — and your spouse’s — taxes. Individuals are considered married if they are legally married as of the last day of the tax year. So, if you get married on Dec. 31, even though you spent 99.9 percent of the year single, the IRS considers you married for the full year.
Once you’ve pledged your love and committed to spend the rest of your lives together, that doesn’t mean you have to (or should) file your tax returns together. You have two options: married filing separately or married filing jointly. Depending upon your personal situation, such as your combined income, choosing separate or joint filing can be to your tax advantage or disadvantage.
If you file as married filing separately, adverse tax implications include:
- You may not be eligible for certain credits, including the earned income credit and education credits.
- A nonworking spouse won’t be able to contribute to an IRA.
- Don’t overlook state taxes. You may get a federal refund but owe a lot in state taxes.
However, filing separately may be advantageous if one spouse owes money to Uncle Sam and the other is due a refund. Separate filing also may save you taxes if one spouse has significant medical expenses, casualty losses or miscellaneous deductions that must meet a percentage-of-income threshold before they can be claimed.
Remember, too, that a husband and wife filing separate returns must use the same method of claiming deductions. If one itemizes, both must itemize.
Joint filing is the most commonly used filing method for married couples. Why?
- You have a lower tax liability if there is disparity in the two incomes.
- You could be eligible for many credits, such as those for education and dependent-care expenses.
- It’s easier because it means filing one federal tax return instead of two.
Marriage tax penalty
And joint filing will continue to have a lot of appeal for couples, especially now that legislation has helped reduce the so-called marriage tax penalty.
In the not-so-distant past, many married couples found their togetherness at tax time cost them. When they filed jointly, they ended up paying more than two taxpayers who lived together but were able to file their returns as single taxpayers. This inequity arose primarily because of the standard deduction and the progressive nature of tax rates.
Two for one
When the standard deduction was created, the amounts were based on the assumption that married couples generally share expenses and therefore live less expensively than do two single individuals, even if the singles make the same amount of money. So the single filers, based on the two-live-more-cheaply-than-one rationale, were given a more generous per-person deduction.
Then there are the income tax brackets. Previously, married couples found more of their income was taxed at higher rates than single taxpayers. And their combined income on a joint return often pushed them into even higher tax brackets.
Changes made – for now
Tax law changes beginning in 2003 have helped ease the marriage tax penalty. The standard deduction that joint filers can claim is now twice that allowed single taxpayers. And the amount of a couple’s income that falls in the 15 percent bracket is double the income range of a single filer. In essence, these changes tax more of a couple’s joint income as if they each were filing as single taxpayers.
This relief, however, is not forever. The marriage penalty tax changes apply only through 2010.
There’s no single answer that fits everyone’s case. So make sure you figure your taxes both as married filing jointly and married filing separately. That way, you can make sure you file the way that will cost you the least combined tax.