When you tie the knot, your financial lives will change. Marriage is one of those life events that can really affect your money and tax situation. If you are about to wed, here are a couple of things you’ll want to consider when it comes to taxes and household cash flow.
You can now elect to file jointly. Marriage allows you to file your income taxes together, and that can really benefit your financial picture. Joint filers may deduct two exemption amounts from their income, which amounts to one of the biggest standard deductions in the federal tax code. For 2019, a single filer can take a standard deduction of $12,200 but a married couple filing jointly can take one of $24,400.
In addition, joint filers are eligible for key tax breaks at comparatively higher income thresholds than single filers, and filing jointly opens the door to eligibility for the American Opportunity and Lifetime Learning Credits, the Child and Dependent Care Credit, the adoption credit and the Earned Income Tax Credit.
So why would any married couple file separately? Good question. In most cases, filing separately invites higher taxes for a married couple, and when marrieds forego joint filing, they become ineligible for the tuition and fees deduction, the student loan deduction and most of the deductions mentioned in the preceding paragraph.
The deduction for traditional IRA contributions really shrinks if you reject joint filing status. Want an example? Look at the difference if you contribute to a traditional IRA in 2019 while covered by a retirement plan at work. Marrieds who file jointly may take a full deduction up to the amount of their contribution limit if their 2014 modified AGI is $103,000 or less. Marrieds who file separately can’t take any deduction for traditional IRA contributions once their 2019 income hits $10,000. (Only a partial deduction is available underneath that threshold.)
In rare circumstances, filing separately may offer particular tax advantages. Take the case of a couple with a high adjusted gross income and major out-of-pocket medical expenses. Under the federal tax code, you can only deduct the amount of those costs that exceeds 10% of AGI. If the hypothetical couple has an AGI of $220,000 when filing jointly, 10% of that is $22,000. If they file separately, the 10% threshold can apply to only one of the couple’s incomes. If the afflicted person has an AGI of $40,000, the 10% threshold becomes $4,000.
Run the numbers to see which filing status gives you the lowest taxes. That may sound arduous, but software and/or a professional tax preparer will make it less so for you. You will probably elect to file jointly, but compare the projections to inform your decision.
Your household budget will likely need adjusting. Maybe you were only budgeting for one before this; now you need to budget for two, or maybe two plus kids. If you are newlyweds without kids, you still need to watch income, debts and assets. Find a screen or a piece of paper and list your combined monthly income sources and your essential and discretionary expenses each month. Aim to save some money per month for your emergency fund, even just a little.
A conversation about how you each see money will be informative. How much should you spend each month? How should you attack debts? What accounts should you consolidate, and what legal and financial paperwork do you need to update? Will you own certain assets jointly, or individually? Beyond the budget, pursuing long-term money goals with a shared investment outlook is important. Life insurance and a will also go on your to-do list.
All this is relevant for blended families too, of course, and they have other concerns as well. Existing trusts and beneficiary designations may need to be modified with the marriage. College aid may be harder to come by: if a “custodial” parent goes from single to married, the stepdad or stepmom’s income goes into the FAFSA calculation. Child support from past spouses may be inadequate or absent. In late 2013, a Census Bureau report looking at the years 1994-2012 found that in cases where the child had no contact with the other parent, child support was paid less than 31% of the time. In 2011, less than 50% of eligible parents actually got 100% of the child support payments awarded to them. About a quarter of eligible parents received nothing. Blended families need to be vigilant about these possible predicaments.
Set aside some time for a conversation. Turn to a financial professional for input, if you wish. When you address these issues proactively, you do yourselves a financial favor. Discussing these kinds of matters and planning for them as a couple can help “marry” your financial lives and put them on the same page.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.