How Marriage Affects Taxes

The 2011 Wedding Season is in full bloom.  If you are one of those who recently got married or are planning a wedding by the end of this year, it is understandable that the last thing on your mind is “TAXES”.  But wait! Do you know that getting married will affect your taxes? It might affect your refund or even increase your tax liability, which are popularly called “marriage bonus” or “marriage penalty”, respectably.  In other words, your tax situation changes for better or for worse after marriage.

Here are the most important things to know:

1. Your marital status at the end of the year will determine your tax status for the whole year. This means that if you are married on or before December 31, 2011 (“married at year-end”), your tax filing status for the whole year of 2011 is “married”.
2. “Married at year-end” qualifies you to file your income tax as married filing jointly or separately. There are decisions to make regarding how the two of you should file.  Jointly is simpler because you only file one Form 1040.  You do not need to figure out which income, deduction and tax credit items belong to which spouse.  Married filing jointly is the popular choice of married couples.  If you file separately, you will need to file two Form 1040, one for each of you, and you will be ineligible for some potential tax breaks that are not available for married filing separately.
3. Notify the Social Security Administration. Report any name change to the Social Security Administration so your name and Social Security Number will match when you file your next tax return.  If you have not received your new social security card by the time you need to file your income tax, use your former name (the name that matches your SS card).  This way, your income tax form will not be rejected by the IRS for mismatched name and social security number.
4. Notify your employer. Report any name and address changes to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year with your correct name and address.
5. Notify the U.S. Postal Service. You should also notify the U.S. Postal Service when you move so it can forward any mail, especially IRS correspondence or refunds.

“Marriage Penalty” and “Marriage Bonus”

Before figuring out what tax form and filing status you and your spouse should use, let us talk about the “marriage bonus” and “marriage penalty”.  “Marriage penalty” occurs in some, especially when both of husband and wife are earning approximately the same taxable income and filing as “married filing jointly”. Other things being equal, they will pay more income tax than if both remain single. The reason for this is our progressive-tax rate structure.  The earner of a higher income pays a higher rate of tax on the last dollar of income. Have a look at the following 2011 tax table:  Please note: The tax rate tables are based on taxable income, which is not the same as the gross income on your paystub or the adjusted gross income (AGI) listed on your tax return. Taxable income is after taking any deductions and other exemptions you are eligible for.

Notice that once you get past the 15% tax bracket, the married filing jointly ranges stop being double that of the single ranges. The ranges get tighter and tighter as you move up in income. To illustrate, let us look at a simplistic example. Let us assume that you and your spouse each made $80,000 in taxable income in 2011. Let’s also assume that they you have no other income (such as interest, dividends, and capital gains) and did not itemize your deductions.  As single taxpayers, your marginal tax bracket will be 25%.  However, after marriage, you can no longer file as a single taxpayer (remember?).  Filing jointly will increase your taxable income to $150,000. Your marginal tax bracket rises to 28%.  The increased tax you will encounter ($310) is called the “Marriage penalty”.

A “Marriage bonus” usually occurs when the two spouses’ income are unequal, that is, one is earning way more than the other. Thus, the more likely that combining their income on a joint return will pull some of the higher-earner’s income into a lower bracket. There are also deductibles and tax credits for married taxpayers, which single taxpayers cannot qualify.

Choosing the Right Tax Form and Best Filing Status:

1. Select the right tax form. Choosing the right individual income tax form can help save money. Newly married taxpayers filing jointly may find that they now have enough deductions to itemize on their tax returns. Itemized deductions must be claimed on a Form 1040, not a 1040A or 1040EZ. However, if you file separately, both of you should use the same form.  IRS will not allow one spouse to itemize and the other one to claim standard deductions.
2. Choose the best filing status. As stated above, a person’s marital status on Dec. 31 determines whether the person is considered married for that year. Generally, the tax law allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but usually filing jointly is more beneficial.
3. Check your withholding. If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will give you the information you need to complete a new Form W-4, Employee’s Withholding Allowance Certificate. You can fill it out and print it online and then give the form to your employer(s) so they withhold the correct amount from your pay.

For more tax tips, visit our sister website, AqBiz.net.

Most people view “prenuptial agreements” or “pre-nups” as distasteful or as a sign of distrust between a couple planning to get married. There’s always the connotation that this piece of paper is insurance when the couple’s “happily ever after” take a turn into a battle in the divorce court; and that it is for the truly wealthy and celebrities only.

Will you put car, home, health and life insurance in the same light? I don’t think so. Prenuptial agreements are similar to these insurances – no one anticipates an accident, fire, major sickness, death or divorce. We certainly do not want to talk about it, but it can happen and sometimes it does happen to us when we least expected; and it is best to be prepared.

Pre-nups is a protection, just like car or life insurance. It may not protect you from every conceivable problem, but if properly drafted, it will certainly limit them. Pre-nups are not prelude to divorces. Any pre-nup which promotes divorce is unenforceable. Yes, a pre-nup is a legal document, just like your marriage certificate. Although you do not need a legal counsel for your marriage certificate, it is best to consult a competent counsel for your prenups.

Before you run to your legal counsel, let me summarize what is the point of prenups. Then you decide if you need it:

• Protection of property. This includes waiving community property rights (for those states that have them), such as real estates, businesses, retirement plans and intellectual properties.
• Providing for (or not) spousal support.
• Preservation of separate property and debt. This ensures that what is yours is yours and that you will not inherit your spouse’s debt in the event that he/she forfeits payment.

Do you get the feeling that pre-nups is about money or assets and debt or liabilities? If so, you are right. What makes pre-nups difficult to talk about before the marriage is that most couples do not want to discuss it. But, guess what the most common topic that couples fight about? You are right – money. It is best to be frank and open about both your finances up front. Then there will be fewer things to worry about later.

There are a lot of things that cannot go into pre-nups. Even if they are stated in the pre-nup, they are not enforceable. These are the following:

• Limitations on child support
• Custody
• Religion
• Promotion of divorce
• Damages for cheating

To get to know more about prenuptial agreement, I recommend Arlene Dubin’s book Prenups for Lovers: A Romantic Guide to Prenuptial Agreements.

In the words of the author, a pre-nup is “… a private agreement between a couple contemplating marriage.  The couple arranges, in advance, financial matters in the event of death …”.  Prenuptial agreements are no longer exclusively for the rich and famous.  They are increasing becoming commonplace for those not so rich and famous, too.