Friday, December 26, 2014

The tax implications of getting married

Your marital status for the entire year is determined as of Dec. 31. This means it doesn’t matter what day you tie the knot, you will be taxed as if you were married for the entire year. So why is the timing of your marriage such an important tax planning decision? There can be a “marriage penalty” when you and your new spouse combine incomes when you file your income tax return. Although it may not be romantic to discuss the tax cost of getting married, the marriage penalty is real for many dual income couples so you should understand what you may be facing in additional taxes.
Logically, you would think that a married couple would incur the same tax liability as two single taxpayers earning the same amounts of income. But as we know, many things in tax law do not make logical sense, and this is one of them. Tax brackets above the 15 percent level are more favorable for single taxpayers than they are for married taxpayers. For example, in 2014, you and your soon-to-be spouse, filing as single, can each have $89,350 of taxable income (or $178,700 combined, assuming equal income levels) before you are subjected to the 28 percent tax bracket. However, once you marry, your combined taxable income over $148,850 will be taxed at a 28 percent rate.
Couples who are married and earn similar amounts of income, especially high earners, will feel the greatest impact from the marriage penalty.
Here is a comparison of 2014 tax bracket levels higher than the 15 percent rate between married filing jointly and filing individual returns.
The 28 percent rate starts at $148,851 for married couples filing jointly and $178,701 for two single taxpayers.
The 33 percent rate starts at $226,851 for married couples filing jointly and $372,701 for two single taxpayers.
The 35 percent rate starts at $405,101 for married couples filing jointly and $810,201 for two single taxpayers.
The 39.6 percent rate starts at $457,601 for married couples filing jointly and $813,501 for two single taxpayers.
So, since you are marrying this year, be aware that it may negatively impact your income tax liability. You should project your income as a married couple so that you can determine the additional tax (if any) you may have when you file your 2014 returns next year.
Here are several other important steps you need to take before tax time rolls around:
Contact the Social Security Administration if you plan on changing your name. Doing so will ensure that your Social Security Number and your new name match when you file your next tax return.
If you have, or are going to have, a new address, be sure to notify the U.S. Postal Service. You should also notify the Internal Revenue Service. This is important because the IRS only corresponds via the U.S. Postal Service, they will not contact you via email or phone.
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. You should also run the numbers to determine the correct amount of withholding needed for your new filing status. To adjust your withholdings, you will need to complete a new Form W-4 for your employer(s) so they withhold an appropriate amount from your pay.
Generally, married filing jointly is more beneficial than married filing separately. However, you should determine which filing status will result in the lowest overall tax liability — combined federal and state — and file accordingly.