‘Til Taxes Due Us Part: Major life change can bring about major tax change
Couples spend tens of thousands of dollars and countless hours on their wedding. They make decisions on entertainment and decorations to the venue and catering. While most couples don’t think “tax planning” while wedding planning, more should add it to their to-do list.
“When a major life change happens, it often means a tax change,” said Andy Phillips, director at The Tax Institute at H&R Block. “Marriage is one of the bigger life changes a taxpayer will make and it’s also one of the bigger tax changes they’ll face. Not understanding the impact of the tax changes to the individual and household can be costly.”
Married couples need to pick a new filing status
People who are married can no longer file using the “single” filing status and usually can’t file as “head of household” either. Instead, they must file either as married filing jointly or married filing separately. The IRS determines filing status based on the last day of the year. So even those who got married Dec. 31 are generally considered married for the whole year.
Many married couples file a joint tax return because it often results in the lowest tax liability. When filing jointly, taxpayers file one return that includes all tax information for both spouses. This makes both spouses jointly and severally liable for what is on the return.
The other option is to file as “married filing separately.” Approximately 2.9 million taxpayers chose this status for tax year 2014. Additionally, some of the tax benefits available to those filing jointly are not available when filing separately.
In some instances, married couples filing jointly can together earn twice as much money as a single individual and remain in the same tax bracket. To make sure the correct amount is withheld from their paychecks, newlyweds should check their withholding allowances on the Form W-4 filed with their employers. This form determines how much federal income tax is withheld from paychecks, based on the number of allowances claimed. Marital status is a consideration that can be taken into account when determining the number of allowances claimed. As more allowances are claimed, less tax is withheld.
If they have dependents, the couple should decide together on any additional allowances for any dependents they claim. If both claim an additional allowance for the same dependent, that could result in too little withholding throughout the year and a possible tax penalty.
Understand house sale rules
If one house was sold as a result of combining two households, meeting the “two-out-of-five” rule could help ease the tax burden of the gain. If the seller owned and used the home as a main residence for at least two of the past five years before selling it, usually the seller can exclude some or all of the gain from taxable income. Generally, the maximum exclusion is $250,000, but joint filers can exclude up to $500,000 if they meet these three requirements:
- Either spouse meets the ownership test
- Both spouses meet the use test
- Neither spouse excluded gain from a home sale in the previous two years.
Marriage could impact health-related tax benefits
When engaged couples or newlyweds discuss their health insurance options, they should keep in mind that their tax filing status can actually impact those insurance options. If a couple decides to file separately, one of the possible tax benefits they will lose is the Premium Tax Credit (PTC), a tax credit designed to help people pay their health insurance premiums from the federal or state marketplaces.
Even if the couple decides to file jointly, the amount of the PTC they qualify for may increase or decrease from what they received as single filers based on their family size and income. If either one or both have been getting an advance PTC, in order to avoid getting too much or too little advance credit, the couple should notify the Marketplace immediately of any changes to their household or income, like marriage or the birth of a child.
Know retirement plan rules
Filing a joint return may give married couples an edge. For example, to contribute to an IRA, individuals must have earned income. For couples with only one working spouse, the law allows a contribution to the IRA of a spouse with no earned income, if they file a joint tax return.
Marriage can bring a lot of change for a couple, right down to their tax return. While planning their taxes as a married couple may not be as exciting or romantic as other elements of wedding preparation, it deserves a spot on every couple’s to-do list before they say, “I do.”
The results of H&R Block’s W-4 survey show consumers not only haven’t updated their withholding after tax reform, but many don’t even know how.
Filing out a W-4 correctly can help taxpayers avoid surprises. H&R Block’s personalized analysis and W-4 calculator can help when filing out the W-4 form.
Major life events, including changes in relationships, can have a big impact on the tax return. H&R Block offers tips for handling divorce and taxes.