Uncle Sam, the Wedding Crasher
(Understanding the Tax Implications of Marriage)
Kelly Pelletier, Tax Senior
Congratulations - you are getting married! After months of planning everything from the ceremony location to the food to the color of the napkins, you may think that you have considered every detail. But what about taxes? As Benjamin Franklin said, “(i)n this world nothing can be said to be certain, except death and taxes.” Your taxes are certain to change upon marriage, in a variety of ways. This article will cover just a few of the more common changes, and point out ways you can optimize them.
What’s in a Name?
Many women (and some men) take their partner’s last name after the wedding (myself included, come July). Other couples hyphenate or combine names, and some do not change at all. If one (or both) partners do choose to change their names upon marriage, the taxpayers must report this name change to the IRS, and should inform anyone who reports information to the IRS on their behalves. This includes employers, investment banks, retirement plan administrators, and many others. It is important to change your name with both the IRS and these other entities so you can avoid any mismatch between income reported to the IRS by others and income that you report on your own return. Such discrepancies are a common reason that e-filed tax returns are automatically rejected, and IRS processing of paper-filed returns is delayed.
In order to officially change your name, you must file a Form SS-5, Application for Social Security Card, with the Social Security Administration. The application can be found here. When requesting a name change, you must attach documentation supporting the name change (i.e., your marriage license), and proof of your identity (i.e., new and old driver’s licenses or state ID cards). Once completed, the SSA will relay your name-change information to the IRS.
Remember to complete this process for any dependents that undergo a name-change. Filing an SS-5 for a dependent may be necessary if children from a prior marriage are adopted by your new spouse.
Change in Filing Status
Before marriage, most taxpayers file as single. After marriage, the only filing status options are married filing jointly (MFJ) or married filing separately (MFS). Generally, married couples can choose the filing status most advantageous to their situation, unless one of the spouses is a nonresident alien, in which case the couple must file separately. Filing status is a determining factor in overall tax liability, filing requirements, and eligibility for tax deductions, credits, and exemptions. Your filing status is determined as of December 31st of the tax year, so if you are married on that date, you must file as MFJ or MFS for the whole year. This is true whether your wedding was on February 2nd or December 30th. See the section “Changing Your W4,” below, for information on planning for this change in filing status.
Married Filing Jointly
A MFJ couple must report its combined income and deductions. Because of this, the standard deduction is generally higher for married couples, and couples may qualify for additional tax benefits than they would receive if filing separately. For example, couples using MFJ status are eligible to claim the Student Loan Interest and the Tuition and Fees deductions. They can also claim the Child and Dependent Care Credit and the Earned Income Credit. Couples who file separately are not eligible for these benefits.
When you file jointly with your spouse, you are jointly responsible for all taxes, interest, and penalties incurred on income earned by you or your spouse. If you think your spouse is hiding income or is erroneously claiming deductions, it may be beneficial to file separately. Alternatively, you may be eligible to file for Innocent Spouse Relief, which exempts you from the burden of any additional tax owed due to your spouse’s failure to report income or use of any improper deductions or credits.
Married Filing Separately
In some situations (like the one above), it may be advantageous to you to file separately using MFS status. Filing separately may also be beneficial if your spouse has too little income tax withheld from his or her paycheck, or if one of you has high medical expenses or other deductions that are limited by your joint Adjusted Gross Income (AGI).
However, keep in mind that the MFS filing status tends to result in more tax for most people because of the special rules associated with it. As discussed above, there are a number of deductions and credits for which married couples are ineligible if they file separately. Another potential disadvantage is that taxpayers who file MFS must both elect to either claim the standard deduction or to itemize deductions, i.e., if you want to itemize your deductions, your spouse cannot claim the standard deduction on his or her separate return.
Finally, the MFS filing status can be difficult for couples with children. Only one parent may claim a child as a dependent, even if both parents are contributing to the health and welfare of the child. The MFS status also disqualifies couples from claiming the Child and Dependent Care credit.
Tax Bracket and the Marriage Bonus/Penalty
As a single person, your tax liability is generally determined on your income alone. When you are married, your tax liability is usually based on yours and your spouse’s income. If you and your spouse are both employed, filing a return with your combined income may push you both into a new tax bracket with a higher tax rate.
When discussing the tax consequences of marriage and combined finances, most experts discuss the tax advantages, or the marriage bonus. Contrary to popular belief, marriage and joint tax filings are not beneficial to all taxpayers. The more commonly heard of marriage penalty occurs when a couple’s tax burden as a married couple is higher than their combined tax burden would have been if they had both filed as single taxpayers. The marriage penalty is seen more often with taxpayers who have similar incomes that are either very high or very low. Recent law changes have diminished this penalty, though, and a marriage bonus can occur when you pay less tax as a married couple. This generally applies to middle class couples with disparate incomes.
The tables below detail the brackets for single versus married filing jointly for the 2017 tax year.
Table 1. Single – Tax Brackets and Rates, 2017
|Rate||Taxable Income Bracket||Tax Owed|
|10%||$0 to $9,325||10% of taxable income|
|15%||$9,325 to $37,950||$932.50 plus 15% of the excess over $9,325|
|25%||$37,950 to $91,900||$5,226.25 plus 25% of the excess over $37,950|
|28%||$91,900 to $191,650||$18,713.75 plus 28% of the excess over $91,900|
|33%||$191,650 to $416,700||$46,643.75 plus 33% of the excess over $191,650|
|35%||$416,700 to $418,400||$120,910.25 plus 35% of the excess over $416,700|
|39.60%||$418,400 +||$121,505.25 plus 39.6% of the excess over $418,400|
Table 2. Married Filing Joint – Tax Brackets and Rates, 20171
|Rate||Taxable Income Bracket||Tax Owed|
|10%||$0 to $18,650||10% of taxable income|
|15%||$18,650 to $75,900||$1,865 plus 15% of the excess over $18,650|
|25%||$75,900 to $153,100||$10,452.50 plus 25% of the excess over $75,900|
|28%||$153,100 to $233,350||$29,752.50 plus 28% of the excess over $153,100|
|33%||$233,350 to $416,700||$52,222.50 plus 33% of the excess over $233,350|
|35%||$416,700 to $470,700||$112,728 plus 35% of the excess over $416,700|
|39.60%||$470,700 +||$131,628 plus 39.6% of the excess over $470,700|
For example, imagine you earn $50,000 per year and your partner earns $20,000. According to Table 1, your tax bracket as a single taxpayer is 25% and your partner’s is 15%. Table 2 shows that as a married couple with a combined income of $70,000, you both fall into the 15% tax bracket. This provides a marriage bonus to you, because you pay less tax than you did before marriage.
Imagine instead that you both earn $150,000 per year. As single taxpayers, you each pay taxes in the 28% tax bracket. Unlike in the previous example, though, when you get married, your combined income bumps you up into the 33% tax bracket and you pay more tax. This is the marriage penalty.
Other bonuses (or penalties, depending on your income), include additional personal exemptions, a higher standard deduction, and different phase outs for certain credits and deductions. If you are curious about the effect of marriage on your overall income tax liability, the Tax Policy Center provides a calculator that will estimate your marriage bonus or penalty.
Changing Your Form W-4
So what happens if you are subject to the marriage penalty? The first step to minimizing your tax burden next April is to change the income tax withholding on your paychecks - now. This is accomplished by updating the input used on IRS Form W-4, a form that directs your employer regarding how much income tax is withheld from your paychecks. (Periodic review of your W-4 is a good idea regardless of whether you believe the penalty will apply.) You can increase your withholding by (1) reducing the number of exemptions you claim and/or (2) requesting that an additional flat rate amount is withheld from each check.
As discussed above, couples with similar incomes should be wary of a change to their tax bracket upon marriage. It is also important to remember that for tax purposes, you are deemed to be married for the entire tax year, not just the portion of the year during which you are legally married. The time to review your Form W-4 and your withholding is at the beginning of the year of your marriage, not after the wedding itself. The IRS provides a handy calculator to help you determine your estimated federal income tax for 2017. Each state is different, so you should consult your state’s withholding allowance form and its instructions to determine any comparable adjustments for state tax purposes.
For self-employed taxpayers, there is no Form W-4. However, the IRS withholding calculator can be helpful in determining estimated tax for the purpose of making quarterly estimate payments. Please consult your tax advisor for more specific guidance.
Most employers’ benefit plans are renewed at the beginning of each calendar year, but allow changes to be made when “life events” occur, including marriage. Prior to your wedding, you should review the cost and benefits of each spouse’s health insurance and other employer-related benefit plans, to determine whether one spouse, and perhaps his or her children, are better off joining the other spouse’s plan(s).
Gift Taxes and Estate Planning
Finally, couples should revisit (or consider creating) their estate plans after marrying. The estate and gift tax rules for married couples are different from those for single taxpayers. For example, spouses are generally allowed to give unlimited gifts of cash or other property to the other spouse without paying gift taxes. Spouses are also allowed to elect to split a gift to another individual by timely filing a Form 709 and reporting that gift. The gift will be treated as if it were made one half by each spouse, which could save on gift taxes and preserve estate tax exemption for later planning. Also, failure to update a will has resulted in many a widow or widower being inadvertently left out in favor of the deceased person’s former spouse or other family members.
Weddings are a great time of celebration – for you and your new spouse, and for your friends and family. By addressing the potential concerns described above, the astute couple can prevent Uncle Sam from crashing the party and leaving them with an unwelcome “gift” the following April that most certainly was not listed on the registry.
For more information, contact your BNN tax advisor at 800.244.7444.
1 The tax brackets for married filing separately are approximately half those for married filing jointly.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.