Once a couple has walked down the aisle and tied the knot, many obvious changes may take place in their lives, such as change of residence, shared living space, and shared decision – making. The new husband and wife will also need to look at changes that will affect their tax filing. Newly married couples should be diligent to ensure that the names that they will enter on their tax returns match the name and Social Security Number on file with the Social Security Administration.
If the wife is taking the husband’s surname, she should obtain and file form SS-5 to indicate the change in her name. Form SS-5 can be obtained from and filed at the local SSA office, online or by phone. A mismatch between the name and Social Security number will cause an e-filed return to be rejected and may also increase tax liability.
Marital status is determined on the last day of the tax year. For example, a couple who is married at 6:00 PM December 31, 2004, is considered married for the entire tax year and will be required to file taxes as married persons. This and all other rules which apply to married couples apply also in Common Law Marriages.
It is not necessary for a couple to have been together for a certain amount of time to be considered married; they must be currently residing in a state that recognizes Common Law marriages or had been living in such a state when the Common Law marriage began. (The states which recognize Common Law Marriages are, Alabama, District of Columbia, Iowa, Kansas, Montana, Oklahoma, Rhode Island, South Carolina, Texas, and Utah.)
The most important change that takes place with a new marriage is the filing status. The Internal Revenue Service (IRS) provides five filing statuses: single, married filing jointly, married filing separately, head of household and qualifying widow. When an accountant or an individual preparing his or her own taxes must decide the filing status, the first step will be to determine the marital status. Whichever filing status a tax-payer uses will affect their tax liability. Newly married couples can file one of two ways: married, filing jointly or married, filing separately.
Generally, when couples file a joint return, their tax liability is lower, which means they will owe a reduced federal tax. Tax rates are usually higher when couples choose to file separately which will increase the overall tax liability that the couple owes. When a joint return is filed, the income, exemptions, and deductions of both spouses are entered on the return. For instance, if a husband has a dependent parent or child, that parent or child is included on the joint return along with the accompanying exemption dollar amount;
the dollar amount for dependent exemptions in Tax Year 2003 was $3050. Spouses filing jointly must also use the same accounting period, either calendar year or fiscal year. Even if one spouse has no income, they may still file a joint return and benefit from the higher standard deduction. The standard deduction is an amount of income that the government allows that is not subject to tax. For Tax Year 2003 the Standard Deduction for individuals filing jointly was $9,500 for a couple under the age of 65.
Each person filing a return can claim their own personal exemption unless they are being claimed as another’s dependent. A spouse may only claim the personal exemption of the other spouse if the other spouse has no gross income is not filing a return and cannot be claimed as a dependent of another individual. An exemption is a dollar amount allowed by the government as a reduction of income.
One spouse is never considered the dependent of the other spouse. Indeed, on a joint return, the couple not only benefits from the higher standard deduction but is also jointly liable for any penalties or fines resulting from one spouse’s under-reporting of income or overstating a credit or deduction.
If a husband or wife discovers that their spouse has included erroneous information on the return and, a fine or penalty is jointly imposed, he or she may apply for Innocent Spouse Relief which may enable him or her to avoid being penalized. The IRS will decide it is inequitable to hold the applying spouse liable. (The “innocent” spouse would file Form 8857.)
For couples who chose to file separately, the standard deduction for Tax Year 2003 was $4,750, for an individual under the age of 65. When spouses are filing separately and one spouse itemizes deductions the other spouse has a Standard deduction of $0. In Community Property states income received for labor or work performed is considered to be shared equally by the couple regardless of which spouse earned it.
When filing separate returns, each spouse must make his or herself aware of the special rules which govern such income. IRS Publication 555 has comprehensive information concerning community income. (Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.) Couples sometimes choose to file separately if they desire that each will be responsible for their own finances. However, many credits and deductions are disallowed from married individuals who file separately.
Those filing separately are penalized as follows: They cannot deduct interest paid on qualified Student Loans; they cannot take the credit for Child and Dependent Care expenses; they cannot take the Earned Income Credit; they cannot exclude income received from qualified U.S. Savings Bonds that has been used to pay Higher Education costs; they cannot take certain education credits, such as the Lifetime Learning or the Hope Credit; they are usually disallowed the Adoption Credit; there are limitations on the Child Tax Credit and on Itemized deductions.
These exclusions further increase tax liability. Infrequently, a couple may find that filing separate returns may result in a decreased liability but the effort to file separate returns is not often worth the small amount of additional refund received. However, if a couple lives in a state where the state tax requirements are less restrictive than the federal guidelines, the higher state return will offset the higher liability imposed by the IRS.
Newly married individuals will also have to view and treat different tax implications that will take hold during their retirement years, such as Social Security and Pension plans. One of the most popular instruments used in planning for retirement is the IRA or Individual Retirement Arrangement.
The amount of money that an individual may contribute to an IRA in a given tax year and the amount of the allowed deduction will be determined by the compensation received by his or her spouse and whether or not that spouse is participating in an Employer-sponsored pension plan such as a 401K plan. These differences in amounts apply to couples filing jointly. As per usual, couples filing separately are penalized in these areas; the amount of money that can be rolled over from a traditional IRA to a Roth IRA is limited.
Additionally, when considering Social Security benefits, a married filing separately status will result in an increased amount of the received benefits to be taxed. An infrequently applied credit, “The Credit for the Elderly and Disabled” is given to individuals who are 65 years of age or older and are permanently and totally disabled by the end of the tax year. Couples must file a joint return to receive this credit.
Newly married individuals may need to file a new Form W-4 with their individual employers. Form W-4 includes a personal allowance worksheet so that the tax payer can calculate the proper amount of withholdings to be deducted from his or her gross pay on a weekly basis. An accurate calculation will usually ensure that tax liabilities are met during the Tax year and no further tax will be owed at year end.
In marriages where both spouses are wage earners, it is usually most beneficial when the total amount of allowances is deducted from the spouse with the higher salary. The other spouse will then claim zero allowances to help reduce overall tax liability. For two wage earners filing separately no change to withholdings need be made except to reduce individual liability.