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How Marriage Can Impact Your Taxes

As you and your spouse prepared to walk down the aisle, chances are you were daydreaming about that beautiful day to profess your love to the world, that search for your first home together, and even starting a family. The honeymoon often ends, though, when it comes to money – what are you going to do with your taxes?

For most married couples, the difference between filing separately or jointly is considerable and the decision is consequential. As we’re coming up on Valentine’s Day and in the heart of the 2017 tax season, let’s discuss this season’s most pertinent question: How will you and your spouse file your taxes?

Let’s look at some examples, and for illustrative purposes, we’ll assume that no deductions are taken.

Married and Filing Jointly vs. Married and Filing Separately

Different Incomes
Kristy is a teacher who makes $35,000 per year. Her husband Steven owns a business, and he makes $200,000 per year. Kristy is in the 15% tax bracket, so she owes $4,786 in taxes. Steven is in the 33% tax bracket and owes $53,707 in taxes. If they file their taxes as married individuals filing separately, the total combined they owe in taxes is $58,493.

However, if they file as married individuals filing jointly, they are in the 33% tax bracket and will end up owing $52,963. They earn a “bonus” of $5,530 by filing jointly.

Similar Incomes
Jeremy is an engineer and makes $120,000 per year. His husband Terrell is in sales and makes $130,000 per year. They are both in the 33% tax bracket, so Jeremy owes $27,307 and Terrell owes $30,607 in taxes. Together, they owe $57,913 if they were to file separately. However, if they filed jointly, then they would owe $57,913 as well.

Tax Credits and Tax Deductions

Other variables to consider in this equation are tax credits and tax deductions. Tax credits are dollar-for-dollar reductions on tax bills. Tax deductions are a reduction in taxable income contingent on tax brackets. Credits and deductions lower net tax bills.

Some of these include, but aren’t limited to:

Keep in mind that filing jointly affords tax credits that may not apply if married couples file separately. In addition, joint filers must meet higher income thresholds for some tax credits and deductions. While they can earn more in combined household income before paying higher rates, they must earn more to qualify for certain tax credit and deductions.

Potential Tax Risks

Filing jointly poses its own risks if one spouse has tax issues, such as owing the IRS money. If a spouse has a tax lien or is in debt to Uncle Sam, their new spouse may assume the responsibility of these burdens if they file jointly. If such couples file separately, the tax liens and government debt remain the sole responsibility of the original spouse. As such, filing separately could shield certain assets from the government.

Filing separately reduces deductions such as those mentioned previously, in addition to deductions such as those for traditional Individual Retirement Account. While it’s good to invest in an IRA regardless, filing separately reduces immediate benefits. One of you may qualify to contribute the maximum to a Roth IRA if you file separately, whereas filing jointly neither of you may qualify.

Adjusted Gross Income (AGI) is the total of all income minus specific deductions. Deductions that require a percentage of AGI are easier to meet by filing separately rather than jointly. Such deductions include but aren’t limited to:

  • Alimony deduction
  • Miscellaneous expenses greater than 2% of your AGI
  • Emergencies greater than 10% of your AGI

This may all sound terribly confusing. No matter how much you learn about taxes here and elsewhere, it’s best to work with a tax professional. The IRS and certain companies offer ways to file taxes for free, but it’s worth your time to speak with a tax professional to get all your tax questions answered.

Whether you and your spouse choose to file your taxes jointly or separately, filing properly may help you more quickly achieve that happily-ever-after you daydreamed about together.

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  1. Janis Neff

    If a divorced couple reunite and the ex husband has not retired but the ex-wife has, is it (re taxes), generally better to “maintain ownership or rent separate properties? ? no.2) If decide to “own” or live together, maintain only 1 “home,” is that a tax advantage or disadvantage? ?3) Does the term “common law” marriage apply in any way and how many yrs post divorce then shared domicile, does this become pertinent and HOW?

  2. James

    Don’t forget about student loan debt. Filing jointly may impact income based repayment plan eligibility.

  3. Mike Mongeau

    Great article, John, and good on Personal Capital for having you write it! The point about Roth IRA’s and reaching the phase out income range when filing jointly is apt, but isn’t this why most of us who fit this situation just backdoor from TIRA to RIRA anyways? Sort of negates that problem, albeit adding just a little more complexity each year come tax filing time.

    • John Schneider

      Thank you, Mike. I appreciate it and Personal Capital for letting me write this one. Your point is correct. With taxes being as complicated as they can be, I tried to keep it simple. But, you are correct. Thanks for sharing.