After people get married, they have a number of financial responsibilities to attend to, one of which is figuring out tax ramifications. While there is a common belief that marriage provides tax relief, this is not always the case. Some individuals will experience a marriage penalty when it comes to taxes.
Couples need to take the time to look at their finances, think through the implications of various decisions, and make the best choices for their needs. Some important things to keep in mind when it comes to filing taxes as a married couple include:
1. Married couples do not have to file together.
While most people think about filing taxes as a married couple as a joint endeavor, each person can actually file separately. The choice made affects the standard deduction offered. Married couples that file jointly had a standard deduction of $24,000 in 2018 and $12,000 each if filing separately.
When one spouse does not work, it can often make sense to file jointly since the IRS will extend certain tax benefits to married couples that do not exist for single filers. This policy is what often grants a tax break for married couples.
However, this is not always the case and the situation can actually change from year to year. Ideally, couples crunch the numbers for filing both jointly and independently each year and then choose the option with the biggest benefit.
2. High-earning couples may incur a penalty.
The most common reason not to file jointly is the penalty that comes if both individuals earn high salaries, especially if they also have children. The combined income can push individuals into a higher tax bracket that actually comes with a much larger amount owed than filing separately.
Certain tax benefits, especially those related to children, phase out among higher earners. When one person makes much less money, this is not usually a problem, especially because the Tax Cuts and Jobs Act eliminated the marriage penalty for most people. However, individuals in the highest income brackets are often still affected, so it can pay off in the long run to investigate filing independently.
3. A spousal IRA loophole can reduce tax burden.
Most people think that only an individual earning an income can qualify for an IRA. While this is true in most cases, married couples in which one person is a stay-at-home parent who file jointly qualify for a spousal IRA. This account makes it possible for the stay-at-home parent to contribute to a retirement account even when he or she does not have annual earnings.
The current contribution limit is $6,000 for individuals 49 or younger and $7,000 for individuals 50 and older. While couples can contribute to either a traditional or Roth IRA, only the traditional option will provide immediate tax benefits by reducing taxable income.
4. Joint filers can deduct education expenses.
One of the biggest benefits that married couples should know about is the ability to deduct education expenses. Only married couples that file jointly will qualify for this deduction. In addition, couples may be eligible for certain credits like the American Opportunity Tax Credit or the Lifetime Learning Credit, which have different gross income limits for married individuals.
Couples can qualify for the Lifetime Learning Credit, worth 20 percent of the first $10,000 in education expenses, provided that modified adjusted gross income is less than $132,000. The American Opportunity Tax Credit, on the other hand, is worth up to $2,500 and is refundable, meaning that couples actually get a refund if the credit is more than tax liability.
5. Spouses can act as a tax shelter.
One of the situations in which it makes clear sense to file jointly is when one partner will report losses. The negative numbers of a failing business can balance out the earnings of another and ultimately benefit both individuals. While the spouse losing money will have to forego certain deductions, such as those related to income, the spouse earning money can use the loss as a write-off.
This benefit is not limited to a business that is losing money, but also especially high medical expenses. The ability to deduct medical expenses often depends on income, so a negative income lowers the overall limit. In these unique situations, it can make the most sense to consult with a professional to figure out the best way to proceed.
6. Divorce comes with its own tax implications.
Tax implications should not factor into the decision to divorce. However, it is worth noting that this status will have an impact on finances. Couples need to decide which person will claim tax credits related to a child since only can do so. Generally, the parents with custody for more than half of the year will claim the child as a dependent.
When couples have multiple children, they can decide to each claim different kids as dependents. Alimony is tax deductible for the person paying it, but taxable income to the person getting it. On the other hand, child support payments are not tax deductible for the payer, but the receiver will not count them as taxable income.