When you’re planning a wedding, the last thing you want to be thinking about are taxes. That said, after the honeymoon, it’s a good idea to start thinking about them. That’s because a lot can change when you go from filing as a single person to a married couple. Those who aren’t accountants likely believe that married couples are either penalized or rewarded come tax time. The truth is somewhere in the middle. There are tax benefits for married couples and there are also some pitfalls, too. We’ll do our best to break down how getting married will impact your taxes in plain English. Here are 12 things worth considering.
You Can Still File Separately
Just because you are married does not mean you need to file a joint tax return. The IRS offers two filing statuses for married couples: married filing jointly and married filing separately. Most couples benefit from filing a joint return. However, there are situations where filing separately makes more financial sense.
For example, combining incomes could mean higher monthly student loan payments for those on income-driven repayment plans. It could also mean having less flexibility for deducting expenses related to medical care. The IRS allows taxpayers to deduct medical costs that exceed 7.5% of their adjusted gross income (AGI). Filing jointly means the threshold necessary to hit that 7.5% bar is raised.
Some couples choose to file their taxes separately in a year with high medical bills because the 7.5% bar lowers on one income if only one person paid a substantial amount of medical expenses. Though, make sure you understand the other trade-offs involved in making such a decision. This can cause you to have different income tax brackets, lose eligibility for some deductions and possibly even for tax credits. Do the math on what filing jointly looks like vs. filing separately. Changing your tax status has several implications you might not readily consider that could harm you more than help. Consult a tax professional if you need assistance making this decision.
Filing One Return Can Cost Less
If this sounds like a no-brainer, well that’s because it is. Filing a single tax return is cheaper than filing two. For young couples in uncomplicated tax situations, the savings may not amount to much. However, for older couples with more complex tax situations, the savings can easily be worth hundreds of dollars.
How much are we talking about, exactly? The National Society of Accountants ran the numbers for 2020. Independent contractors with personalized deductions who had investment income/loses and rental income/loses paid an average of $726.
IRA Contribution Rules Change
To contribute to an IRA you need to have earned income of some kind. Typically, that’s income you receive from being employed. However, this rule does not apply to married couples. If one partner is out of work or stays home, the other can still make their full IRA contribution for the year. This can be especially helpful for married couples with vast differences in income.
Married couples filing jointly with traditional IRAs can take a full deduction up to $103,000 of combined income. For those with Roth IRAs, the benefits come down the line (as in during retirement) but are no less impressive.
There’s No Doubling Dipping On SALT
First off, “SALT” stands for “state and local taxes.” These can be deducted from a person’s federal income tax filing. The individual deduction is capped at $10,000. The bad news is that married couples also face the same cap regardless of whether they file jointly or separately.
If married and filing separately the SALT cap for an individual is $5,000. This can hit two high earners who get married particularly hard. It can also hit one high earner hard as their maximum SALT deduction drops. For everyone else, though, the SALT cap is not worth worrying about. If you take the standard deduction it’s not something that should ever even cross your mind.
High earners and people living in high-tax states or locales are the most directly affected by the rule changed during tax reform in 2018.
You Can Maximize This 2021-Only Tax Deduction
The CARES Act of 2020 has made it easier for people to receive tax benefits for their charitable donations. Up to $300 in cash donations can be deducted per person. This means married couples can realize a $600 tax deduction.
There are a few things to note here. First, the charity you donate to has to be recognized by the IRS. Second, you can take this deduction alongside the standard deduction. Yes, there is no itemization required (meaning you can take the standard deduction and layer this one-time only deduction on top of it, without itemizing.) Third, you have to give cash in some form and cannot claim this deduction for donating property, time or items. Finally, unless Congress acts, this deduction will be phased out after the 2021 tax year.
Your Charitable Donation Write-Offs Will Increase
This is another one that only requires simple math to understand. Those who itemize their deductions can generally write-off up to 50% of their charitable donations (money or property). However, some 20% and 30% limitations can apply in certain cases. When you get married and file jointly your income increases (if you both earn money, that is). This increases your maximum tax deduction for charitable contributions.
This may seem like it can only benefit the super wealthy. However, there are benefits to those who live a more normal life. Donating a car to charity for example could lower the tax bill of a couple by a few thousand dollars. This could make it easier to qualify for adjusted gross income (AGI) based tax incentives.
Qualifying For The EIC Is Harder
The “EIC,” or “earned income credit,” is designed to reduce the tax liability of low and moderate earners. It is income-based and also takes into account the amount of children a couple has and their investment accounts. To qualify for the EIC in 2021, a single filer with no children can have a max income of $21,430. For married couples that number is $27,380.
This puts the EIC out of reach for many married couples. Those with children don’t do much better, either. A single parent with three kids qualifies for the EIC with an AGI of up to $51,464. For married couples that rises to just $57,414.
Note: This credit can be claimed by married couples filing separately. However, specific conditions have to be met and this appears to be a “just for 2021” exception to the tax code.
Your Spouse’s Tax Debt Can Become Yours
Yes, in certain situations you are liable for your spouse’s tax debt. Helpfully, any tax debt incurred before your marriage is not your responsibility. That said, if you are married and file jointly then any debt owed by your spouse is also owed by you. This is also the case if you are separated but not legally divorced and file a joint tax return.
The way to avoid this risk is simple: File separate tax returns. This isn’t just something for high-powered couples in sketchy financial situations to consider. Even normal people can benefit from filing separately to avoid one spouse’s tax debt. Remember, the IRS takes what it’s owed before issuing a refund. This means one spouse’s tax debt can eat into the refund of the other. Depending on the cost, it may be smarter to file separately and protect the refund.
How The IRS Measures Marriage
One big thing to note is that to the IRS, it does not matter when you get married. Whether you are married on January 1st or December 31st, your tax filing status for that year is “married.” This is good to know because most married couples often have higher combined incomes. This can make it harder to maximize certain deductions and qualify for some tax credits.
Postponing a wedding for tax reasons is the most unromantic thing ever. It could be the prudent financial move for some couples, though. Make sure you consider all elements before making this decision, as marrying before the New Year rings in could result in more tax savings through more generous (re: wider) income tax brackets, especially if one spouse-to-be earns far more than the other. If the income of the higher earner would have fallen into a higher tax bracket as a single filer, they can push some of this money into a lower tax bracket as a result of the increase in income tax bracket ranges through filing jointly as a married couple.
You Might Pay Higher Medicare Taxes
Married couples can be subject to higher Medicare taxes. Medicare tax paid by the individual is 1.45% for those employed by a company and 2.9% for those who are self-employed. (Though the IRS allows you to deduct half of these as a business expense, lowering the effective tax burden on the full 2.9%.) This increases by 0.9% for single taxpayers who make over $200,000 a year. Unfortunately for married couples, the income threshold is not doubled. Instead, it’s $250,000.
This may not sound like a lot, but it significantly increases the amount a married couple pays in Medicare taxes. A couple making $249,000 combined would pay $3,610 in Medicare taxes. A couple making $250,000 would owe $5,875. This results in a marriage penalty when it comes to taxes.
You Can Write-Off Your Spouse’s Losses
Say your spouse decides to open a business and has a rough first year while you stayed in the corporate world. If you file jointly, their loss can be your collective gain. That’s because their losses can help lower your taxable income, which could lead to a larger refund.
Remember that this only comes into play if your spouse’s business reported a loss. It’s also worth noting that you may want to carefully consider filing jointly in such a situation. A failing business is likely to rack up debt, and if you file jointly that debt becomes shared.
Your Standard Deduction Only Doubles
The maximum standard deduction for an individual in 2021 is $12,550, or $25,100 for a married couple. On paper this looks great, but it’s not actually the max standard deduction a couple can realize. If a couple is living together and co-parenting a child, marriage may lead to a lower total standard deduction. This is the case when the standard deduction and head of household standard deduction are combined. “Head of household” can only be claimed by a single filer who cares for a qualifying dependent. This list includes children, family members, relatives and foster children.
For 2021, the head of household designation pushes the max standard deduction to $18,800. Combine that with the standard deduction of $12,550 and that’s a total deduction of $31,350. Getting married and filing a joint return offers a host of benefits. A maximized standard deduction isn’t one of them, though.
The Bottom Line
Marriage changes the way you file taxes along with what credits and deductions you qualify for. That’s certainly no reason to reconsider getting married. At worst, taxes should only push a wedding off into the next tax year. In reality, most couples will simply want to see whether filing joint or separate returns makes sense. As with all things financial, it’s best to both do your research and speak with a professional before deciding anything.