When you get married, you're not only combining homes, but possibly tax returns, as well. Will marriage save you money on your taxes, or will you be penalized with a tax bill for your nuptials? Follow these steps for the lowest possible taxes as a wedded couple.
Can You File as a Married Couple?
If you weren't married on the last day of the tax year for which you are filing, you can't declare yourself either married filing jointly or married filing separately. You will likely both declare yourselves as single individuals. Thus, if you get hitched on January 1, 2014, you can't declare yourself married on your tax returns for the 2013 tax year.
Review Restrictions on Married Filing Separately
There are two restrictions on filing separately that could automatically end discussions regarding these options, or have you thinking harder about which tax option to choose.
- Prohibited Deductions and Credits
If you file as married filed separately, you cannot claim student loan interest deductions, tuition and fees deduction, the education credits and earned income credits. If you qualify for more than one of these credits and deductions, it's possible you could lose more than a thousand dollars of your refund by filing separately.
In addition, if you file as married filing separately, you both have to choose either to take the standard deduction or itemized deductions. What that means is that one of you has enough deductions to file an enormous amount of deductions, such as business or medical expenses, and the other spouse has to do the same.
Living in a Community Property State If you live in Arizona, California, Idaho, Louisiana, Nevada, New, Mexico, Texas, Washington or Wisconsin, you will have to deal with a whole set of complicated rules to decide what is considered community or marital income and what is considered your income. And the rules can vary by state. Your combined income could be split equally between the tax returns, and negate the purpose of filing separately. If you plan to file married filing separately, it would be wise to use tax software or hire an accountant.
Discuss All Possible Tax Liens
One reason many married couples file separately is that they have prior debt that is past due and could be deducted from their taxes. This includes past-due child support, past-due student loans or a tax liability of a spouse incurred before the marriage.
However, filing separately for this reason may not be necessary. IRS Form 8379, Injured Spouse Allocation, can be filed each year with your married filing jointly tax return until your spouse gets caught up on his/her debt. This can help the spouse who doesn't have the debt not be penalized for their half of the return. Plus, deductions and credits not available to those filing separately can still be declared.
Consider the Income Factor
When one spouse makes more than the other, the marginal tax rates for both of them could be the best wedding present they've ever received.
For instance, let's say Julie and Jim get married on December 27, 2013. Julie is a marketing manager whose taxable income in 2013 was $55,000. Jim just completed his MBA on December 15, 2013 and has taxable income from his fellowship of $8,000. Without her soul mate, Jim, Julie would pay 25% of her taxable income above $36,250, now she pays 15% of that amount. Plus, they would get to claim the deductions and credits that would be prohibited for married filing jointly. (For a full list of tax rates, read Money Saving Year-End Tax Tips.)
Gather All Needed Documents for Filing
Whether you file married filing jointly or married filing separately, you always need all of your paperwork to get the optimal deductions, and as a married couple, you have to make sure your spouse gathers his/hers at the same time. The biggest tax waster is not filing for deductions and credits for which you are entitled.
Prepare Two Sets of Tax Returns or Ask an Accountant
File the version with lower taxes. If you prepare your taxes on software, it will take you an extra couple of hours to do this, versus just filing the way you think is best. But doing this at least once will help you decide how you will want to file in future years.
The Bottom Line
If you file married filing separately, you are going to endure a more complicated tax process, especially if you live in a community property state. You will also likely lose out on key deductions and credits. However, you never know which way is best to file until you try both out through filling out forms and filing the way that works best. And since one of the biggest reasons couples fight is money, the large refund is the best wedding present the IRS could give you. (For further reading, checkout Happily Married? File Separately! and Combining Credit For A Happy Financial-Ever-After.)