For most of us, the decision to get married is more about romance than finances. Money is only part of what creates a compatible couple. Yet it would be foolish to ignore the financial consequences of marriage – specifically, the tax implications. Smart couples face a number of key tax decisions that can save or cost them thousands of extra dollars per year come April. Today, we’ll review these important implications, as well as the tax perks available to married couples.
File Jointly or Separately?
The first tax question confronting any newly married couple is your filing status. You have two choices:
- Married filing separately
- Married filing jointly
There are pros and cons for each. Couples who are married and filing jointly, for instance, may enjoy lower tax rates on their combined income. Married filing jointly also makes each of you responsible for the accuracy of the return: both spouses must sign. Generally speaking, there are more tax benefits to filing jointly, but there may reasons to file separately.
If one spouse is self-employed and the other doesn’t want to be connected to the business, filing separately may be an option. Filing separately might also make sense if one spouse owes income taxes and it would threaten the other spouse’s refund to file jointly.
Potentially Lower Income Taxes
We noted above that married couples filing jointly qualify for lower combined income tax rates than couples filing separately. This is especially attractive to couples with differing levels of income. But this is not the only way marriage can impact the size of your IRS bill. A number of tax credits may only be claimed by couples who file jointly, including:
Another consequence to consider is that if you are married and filing separately – and one spouse itemizes their deductions – the other spouse gets a standard deduction of $0. This essentially forces the other spouse to itemize (whether they originally found this to be desirable or not) to avoid losing tax deductions altogether.
No Estate Tax
One of the most powerful tax benefits available to married couples is the unlimited marital deduction. As SmartMoney explains:
“If your spouse is a U.S. citizen, you can leave any amount to him or her with no federal estate tax hit. If you are a U.S. citizen, your spouse can do the same. This is the so-called unlimited marital deduction privilege. For married couples, the $5 million federal estate tax exemption and the unlimited marital deduction privilege provide significant federal estate tax shelter for those who die in 2011 or 2012.”
Don’t ignore this. A freshly married couple in their mid-20’s might not be thinking about estate planning (it’d be a little weird if they were) but as the years pass, it will increasingly loom large in their future decision making.
Exempt From Gift Taxes
Married couples also get more bang for their buck when it comes to the gift tax exclusion. Currently, there is an annual federal gift tax exclusion of $13,000 for 2011 (meaning your recipient can “”immediately and without restriction use, possess, or enjoy the gifted property” without tax consequence to you.) As a married couple, you get to combine this exclusion. SmartMoney offers the following potential scenario:
“With two adult children and four grandchildren, for example, you and your spouse could each give them $13,000 each in 2011 for a total of $156,000 (6 x $13,000 x 2). Then, do the same thing in 2012. Over the two years, your taxable estates would be reduced by $312,000 (2 x $156,000) with no adverse federal gift or estate tax effects.”
As your wealth grows, be mindful of ways to use the gift tax exclusion to strategically transfer assets to loved ones (or between each other.)
Child Tax Credit
No tax benefit is more appealing to child-rearing couples than the Child Tax Credit. This credit, the IRS says, enables couples to reduce their taxable income by as much as $1,000 per every “qualifying child” they have. Six criteria decide whether your child qualifies: age, relationship, support, dependent, citizenship, and residence. The child must be under 17, not have provided “more than half” their own support, must be related to you (by blood, marriage, or adoption), a U.S. citizen, claimed as a dependent on your tax return, and live with you for over half the year.
When trying to decide how to file, don’t worry. TurboTax can help you figure out whether file married filing jointly or married filing separately.