tax tips

Just got hitched? Here’s some Tax Stuff for you

While choosing a wedding day, the Irish are believed to follow this dictum: “Monday for wealth, Tuesday for health, Wednesday the best day of all, Thursday for losses, Friday for crosses, and Saturday no luck at all.”  For the purpose of your taxes, the IRS is not interested in the day or the date of your wedding.  You are treated as married the whole tax year even if you married on December 31.  For that year and on, you can file your tax return either as married filing separately or married filing jointly.

Before you start thinking of filing your returns, etc., you will need to take certain steps on getting married. If you have changed your name, you will need to get your name changed on your Social Security Card by filing Form SS-5 with your Social Security Administration Office. You will also need to inform the change of your address with the US Postal Service and the IRS either on IRS Form 8822 Change of Address or by means of a letter addressed to the IRS Office where you last filed your return.  If your address changed before filing your return, you will need only to give your new address and the IRS will make changes in their records.

If you, your spouse or both are eligible for the Premium Tax Credit (PTC), your marriage would entail a ‘change in circumstances’ for your insurance coverage.  You will therefore need to inform the Health Marketplace of your marriage early so that they re-calculate your advance payments or tax credits.

You may also want to review your contributions to retirement funds and also change your plan beneficiary.

If you are residents of any one of the community property States viz., Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin you will have to wade through myriad rules of the State regarding the properties acquired before marriage and later. This would be very relevant to if you intend to file your returns ‘married filing separately.

As soon as you get married, you may need to change your withholding tax.  You will need to check if the withholding presently being done is sufficient or if you need to increase the withholding amount given your new income level.  This you can do by filling out Form W-4 and submitting it to your employer.  You are expected to do this within 10 days.

You can check out Premium Tax Credit and Know the Five IRS Filing Statuses to know more.

How does marriage affect your taxation in US?

Filing status: First and foremost, if your status is married as on December 31 or the last day of the tax year (if your tax year is not calendar year), you will be treated as married for the whole year and you will have to file returns either as ‘married filing jointly’ or ‘married filing separately.  A quick look at the tax brackets for both the filing status could be a starting point to help you make a choice.

Married filing separately Tax Rate  Income Range for 2021 Income Range for 2022
10% $0 – $9,950 $0 – $10,275
12% $9,951 – $40,525 $10,276 – $41,775
22% $40,526 – $86,375 $41,776 – $89,075
24% $86,376 – $164,925 $89,076 – $170,050
32% $164,926 – $209,425 $170,051 – $215,950
35% $209,426 – $523,600 $215,951 – $539,900
37% Over $523,600 Over $529,900
Standard Deduction $12,550 $12,950
Married filing jointly Tax Rate Income Range for 2021 Income Range for 2022
10% $0 – $19,900 $0 – $20,550
12% $19,901 – $81,050 $20,551 – $83,550
22% $81,051 – $172,750 $83,551 – $178,150
24% $172,751 – $329,850 $178,151 – $340,100
32% $329,851 – $418,850 $340,101 – $431,900
35% $418,851 – $628,300 $431,901 – $647,850
37% Over $628,300 Over $647,850
Standard Deduction $25,100 $25,900

You will notice that the tax brackets from 10% to 32% for married filing jointly is twice as much of married filing separately (which is the same as single filing).  The top two brackets are not twice as much.  The standard deduction is however doubled.  What it means is that at the lower tax brackets, you will be better off if you filed jointly.  If your income levels fall into the higher tax brackets, you would be losing on your taxes – commonly known as the ‘marriage penalty.  Essentially, if one of you is earning much more than the other, you will find that the higher-earning spouse will fit into a lower tax bracket on filing jointly.  You can file a joint return even if only one of you is earning or having deductions.

Responsibilities of joint filing: If you choose to file jointly, you need to be aware of the concept of ‘joint and several liabilities.  Each of you will be responsible for the tax liability of the other. What this means is that when filing jointly, you will be jointly and severally liable for the errors or inconsistencies in your spouse’s tax information provided.  You will be not only jointly liable for any tax shortfall, penalty and/or interest but will be individually also liable for tax demands made for each of the years you filed jointly even if you are divorced. Filing separately frees you from any errors or under-reporting of income by your spouse either inadvertent or deliberate.

Pros and cons for filing jointly or separately: Filing a joint return allows you to file a single return combining the incomes of both spouses and effecting combined deductions and expenses.  You will have higher deductions to itemize and lower your tax liability.  These include medical and dental expenses, contributions to charity, interest on the mortgage, state taxes you paid, casualty losses, etc. You will however have to follow the same accounting period and both the spouses have to sign on the form.  While filing separately, you are responsible for your own taxes only.  You provide information only on your income and individual deductions.  The flip side is that if your spouse itemizes deductions, you will also have to do so.  You cannot claim standard deduction. It will be a good idea to prepare returns for both the statuses, compare them and choose the one that lowers your taxes.

Married filing jointly lowers your combined tax as compared to filing separately. All education-related deductions and credits such as student loan interest, tuition and fees, American opportunity and lifetime learning credits are available when filing jointly.  You claim certain tax credits like Earned Income Tax Credit, Lifetime Learning Credit, American Opportunity Credit, Child and Dependent Care Credit, etc under joint filing which you cannot claim when you file separate returns.  If both of you are living in a non-community property State and filing separately, you can claim medical expenses only to the extent either of you has paid for it.   If the expenses have been paid from a joint checking account, it will be presumed that each of you have paid equally and so you can claim only half the expense.

Filing separately makes sense in certain scenarios. There are certain expenses which are allowed in excess of a percentage of your adjusted gross income (AGI).  Like medical expenses, you can claim a deduction only in excess of 7.5% of your AGI.  Filing jointly especially when the income difference between the spouses is high will fetch you less benefit.  Same is the case with unreimbursed business employee expenses which can be deducted only in excess of 2% of AGI.

What if you are married to a non-resident alien?

Let’s say you are either a US citizen or a resident alien and you got married to a non-resident alien in 2021.  Since you are now married, you cannot file singly and for the year 2021 you will have to file under married filing separately. You have an option to file as head of household provided you can show that you are paying half the expenses for your household for dependents other than your non-resident spouse.

The IRS allows you to choose to treat your nonresident spouse as a resident alien after which you will be able you to file married filing jointly.  This choice has to be made by electing for the same when you file your return by filing a joint statement asking for being treated as a resident. Your non-resident spouse will also have to provide either a social security number (if eligible) or individual taxpayer identification number. Once you made the choice to treat your nonresident spouse as a resident, you will have to continue to file married jointly till you revoke the choice or it gets suspended. From the tax year you make the choice, both of you will be treated as residents and thus you will have to pay taxes on all your worldwide income. Generally both of you will not be able to avail yourself of any tax treaty benefits as residents of another country except for a few specified incomes arising in another country.

Tax concerns for same-sex couples in US: If same-sex couples marry in a State which recognizes such marriages, the IRS considers them married for Federal tax purposes.  It is not necessary for such couples to stay in the State which recognizes same-sex marriages – it is enough if they were married in such a State.  At the Federal level, only married couples are allow to file as married.  Registered civil unions or registered domestic partners are not allowed to file as married at the Federal level, some States however allow it.  You may have to verify the rules applicable to the State you are living in.

Taxation is not a simple process.  It would be better to consult a tax practitioner or CFO in USA.  You can click here to get help.