Tax implications are often the last thing we think of when we hit a major (or minor) life milestone. Whether you’re getting married, having a baby, changing jobs or moving, each situation brings with it a number of tax consequences that impact the way you will file your taxes. This blog series will present a list of several common life events and our tips to help you prepare for their respective tax implications. This first installment will provide you with useful information about the tax changes that occur when you get married.
TAX FILING STATUS
Once married, you might ask: “what is my new filing status, and should we file jointly or separately?” Generally speaking, it’s most cost effective to file jointly. However, if both spouses have similar income levels and one spouse has very high itemized deductions (e.g. medical expenses), it might be beneficial to file separately.
When changing your filing status from “single” to “married,” your employer will withhold less tax from your paycheck. You should be aware, however, that if both spouses are earning roughly the same, you will likely end up with a large balance due on your first jointly-filed return. To avoid this, there is an option to change your withholding status on Form W-4 to “Married but withhold at higher single rate.”
BENEFITS: WHOSE TO USE?
Benefits from one spouse’s employer (i.e. health, dental, life insurance, retirement contributions and employer matches) might be better than those available to the other spouse. Health insurance plans, for example, may be more affordable through a family coverage plan than two separate “single” coverage plans. When it comes to 401(k) plans, some couples find that it benefits them most for one spouse to increase his/her contribution to take advantage of the employer’s match, with the other spouse stopping elective deferrals. This changes the net paychecks for each spouse, but overall the couple would be getting more out of their joint benefits.
The amount you’re allowed to contribute to your Roth or Traditional IRA account may change when you get married. Generally, the limit for contributions is the lesser of $5,500 ($6,500 for those 50 and older), or your taxable compensation.
- Traditional IRA – Example: One spouse earns $3,500 and the other earns $50,000. If filing jointly, each spouse could contribute $5,500 and receive the deduction on their jointly-filed tax return. If filing separately, however, the spouse with smaller income would only be able to contribute $3,500, while the other spouse could contribute the full $5,500. If you are covered by a retirement plan at your job, your income must be below certain limits to qualify for the tax deduction for contributions to a Traditional IRA.
- Roth IRA – If your adjusted gross income (AGI) is above a certain level, you may no longer contribute to a Roth IRA. For 2017, the married filing jointly amount is $196,000 ($133,000 for single people). This means (if your earned income is above the limit) that Roth contributions you were making before marriage may no longer be allowed.
Some additional things that may apply to you include:
- Sale of Home Exclusion – Taxpayers can exclude $250,000 of gain from the sale of their main residence. This amount doubles to $500,000 when married filing jointly, as long as the spouses have used the home as their principal residences for two out of the previous five years.
- Name Change – You should keep in mind that any name changes that took place with the Social Security Administration should be relayed to the IRS, as records for both should match.
- Taxpayer vs. Spouse – Once married, one spouse must be listed as the “taxpayer,” with the other spouse listed as “spouse.” While this is merely cosmetic and doesn’t mean much beyond the way you and your spouse are listed on tax filings, it’s just one more component to think about.
This blog was meant to provide an overview of the common implications you might face when getting married, but there are likely additional considerations dependent on your specific scenario. And, while many of the above are fairly simple changes for newlyweds, it is important to plan ahead for any and all adjustments that will affect your taxes. At FF&F our experienced staff will act as your advisors throughout each step of any event that might affect your tax planning. For more information on this topic, or to discuss tax planning strategies, please contact us at firstname.lastname@example.org or (212) 245-5900.
John Gontijo, CPA, MBA, is a Tax Manager at Farkouh, Furman & Faccio. He has over 10 years of experience with high net worth individuals, small businesses, and international taxation. Prior to joining FF&F, he worked for a niche CPA firm in NYC which specialized in inbound U.S. tax matters for German, Swiss, and Austrian clients, including Offshore Voluntary Disclosure Programs.