So you’ve tied the knot and you’re experiencing all the joys of married life. You’ve decided on your living location, made plans for decorating, and had a discussion about sharing bank accounts and bill sharing, but what about how you will file taxes as a person of the newly married club. You’ve both been filing single for years and now you’re married, so how should you file…married separate or married jointly? Are there tax benefits or setbacks associated with filing married jointly? Let’s take a look.
A great place to start when considering your new tax situation will be to run a tax projection with your combined incomes. The purpose of this will be to help you get a better idea of the impact of filing married. If your incomes are relatively similar, there may not be a major change. However, if one of you makes significantly more than the other, the lower earning spouse may be in for a surprise in that their income could be subject to a higher tax bracket. In addition, if you were below the 15% ordinary income bracket and you’re now pushed into a higher bracket, you could see your long term capital gain rate go from zero to either 15% or 20%.
You may ask now, what about filing married separate. This is a common question asked .There’s typically no magic way you’re going to reduce your tax burden by a special filing method.Unless there are some significant deductions, such as medical expenses, it won’t make a difference in comparison to married filing joint.
Something else worth noting is that you want to consider if your spouse participates in a 401k or 403b plan through their employer. This could limit your ability to contribute to an IRA based on your combined income.
One last thing to make note of is the introduction of the new tax plan which changes the entire planning process. Many of the traditional deductions, such as state taxes, will be eliminated. In addition, with the increase of the standard deduction and elimination of the personal exemption, some may have a very different tax calculation in the years to come.
These are just a few things to consider when attempting your taxes after marriage. An experienced financial advisor can help you decide what your best course of action could be if you are still on the fence about whether to file married separate or jointly. Best of luck and happy tax season to you and yours.