Getting married is one of those life events that can throw your financial plan into disarray, but financial planning doesn’t have to be daunting after marriage. People have been getting married for years.
If you got married this year or are simply planning to, your tax situation will change significantly and careful planning today can mean you save as much as possible next year.
Check Your Tax Withholding
The first item on the list should be adjusting your tax withholding with your employer.
When you are newly married, your income tax liability will change depending on your spouse’s income. It can be higher or lower and adjusting your withholding will ensure you don’t over or underpay your taxes.
For example, if your spouse isn’t working, you’ll see a tax savings as a result of being able to add an additional personal exemption – $4,000 in 2015 and $4,050 in 2016 – without a corresponding increase in income. You’ll also be able to double your standard deduction from the $6,300 that it would be if you are filing individually, to $12,600 under married filing jointly. All of that will lower your taxable income, and therefore your tax bill.
If it looks like your tax liability will be lower this year, then you can increase your W-4 allowances. This will lower income tax withholding from your paycheck, and improve your cash flow immediately.
If your spouse brings in an income, particularly one that is comparable to yours or higher, you may see a higher total tax liability. Your spouse will also have withholding to adjust.
Work with your company’s HR department or payroll department to change your withholding. You can use TurboTax W-4 calculator to help you determine the optimal withholding allowance.
Consider Itemizing Deductions
As a married couple, it may make sense for you to claim itemized deductions rather than the standard deduction. Itemized deductions require a little more effort since you will need to have your receipts for tax deductible expenses ready when you file your taxes, but you may find that the extra work saves you more money on your taxes. If you prepare your taxes using TurboTax, it will ask you simple questions about your expenses and then figure out if you save more by itemizing instead of taking the standard deduction based on your answers.
As the end of the year gets closer, you may benefit from making an extra mortgage payment, making charitable donations, and taking other steps so that you can take itemized tax deductions. For example, if you intended to make a donation to your favorite charity, doing it on December 31st makes it an event for the current tax year. If you find that you don’t have enough tax deductions to itemize, you could push the donation to January 1st in the hopes you’ll itemize next year.
Think About a Spousal IRA
If your spouse doesn’t work, you can still contribute to an individual retirement account. It’s known as a Spousal IRA and the rules are the same as any other IRA. It was created because the IRS did not want to penalize stay at home parents, whose jobs are hard enough as it is.
The requirements are first, you must be married and with a filing status of Married Filing Jointly. Next, the working spouse has to have enough earned income to contribute, and thus deduct from his or her income. The contributions limits and other IRA specific rules are the same.
File Jointly or Separately?
As a married couple, you have the option to file jointly or separately and you should choose the status that results in the lowest tax liability. For most couples, married filing jointly may be a better financial option.
When you file as married filing separately, you may lose a lot of tax deductions and credits since you have to file married filing jointly to claim tax benefits such as education tax benefits, Earned Income Tax Credit, and the Child and Dependent Care Credit.
Tax planning is all about advanced preparation, and marriage is one of those events you can see coming so plan as much as you can today.