4 Ways Getting Married Will Change Your Taxes

When you walk down the aisle, your vows aren’t likely to include the words “Till death—and taxes—do us part.”

But including that clause may not be such a bad idea, because once you tie the knot, your tax situation has the potential to go from simple to complex fast—not to mention the fact that you’ll have to reconcile any disparate tax strategies.

For instance, Melissa and Lee Bernhoft, Houston–based newlyweds who got married in April, have two very different attitudes toward declaring exemptions: Melissa likes to declare more, while Lee prefers fewer.


“My expectation is that I’ll have to pay [the IRS] back, but that’s not her style. She would prefer to give Uncle Sam an interest-free loan,” says Lee, 30, a finance professional. Meanwhile, Melissa looks forward to getting a refund. “It makes me more nervous to have to owe a big lump sum of money,” says the 33-year-old IT audit relationship manager. “And I’m nervous that because my husband under-declares I don’t know if I’m going to get that sweet little check I’m used to.”

The one thing they can agree on? For the first time ever, they’re going to use an accountant to help them file and navigate their new tax situation.

If you’re newly wed like the Bernhofts, chances are you’re also confused by the uncharted tax territory that lies ahead. And with less than two months to go until the filing deadline, a good place to start would be simply to understand what’s different now that two incomes have become one.



So we asked a few tax professionals to outline some of the most significant changes that happen once you go from single to married. Here are four major differences to consider before you file.

1. Your filing status will change

You’ve kissed the single life goodbye, which also means kissing goodbye your single filing status—you must now file as either married filing jointly or married filing separately.

For most couples’ tax situations, married filing jointly will likely make the most sense. Not only could you enjoy a lower federal tax rate than when you were single, you’ll also be able to take advantage of tax breaks like the earned income credit (EIC) and various educational deductions and credits that aren’t available to couples who file separately, says Lisa Greene-Lewis, a CPA and TurboTax expert based in San Diego.

The likeliest reason to choose a married filing separately status would be if you feel one of you is at risk for an audit or has tax “baggage,” like owing a lot in back taxes, says Andrew Poulos, a greater-Atlanta-based tax accountant and principal of Poulos Accounting & Consulting. Filing separately will help provide some protection from tax liability for the other spouse. “If one spouse has a balance owed to the IRS from prior years, filing as ‘married joint’ allows the IRS to offset any refund from their joint return against the prior collection balance owed by one of the spouses,” he says.

The overarching rule to remember? “The minute a couple signs a tax return as ‘married joint,’ it doesn’t matter whose share of the money creates any sort of liability—both spouses are equally liable for the full amount even if they are divorced at some point in time,” Poulos adds.


2. You’ll probably change tax brackets

For better or for worse, as a newly married couple you’ll likely be entering a new tax bracket together. Whether or not that works in your favor depends on your individual situation, but generally, the more disparate your incomes, the more likely you’ll be able to lower your tax burden. This is sometimes referred to as the “marriage bonus.”

For instance, if your income is $40,000, as a single filer you would fall into the 25% tax bracket for 2015. Let’s say your spouse makes $30,000. If you file jointly, your $70,000 household income now pushes you both down into the 15% tax bracket.

If you both earn similar incomes, and particularly if you’re high earners, you’re more likely to experience the “marriage penalty”—having a higher tax burden than you would have had if you were filing as single. “Adding two high, equal incomes together could easily push a married couple’s income into a higher tax bracket, which results in a ‘penalty,’ ” Poulos says.

For example, a single person who makes $80,000 would be in the 25% tax bracket, but a couple earning $160,000 falls into the 28% bracket for 2015. Not only that, but the higher your joint income, the more likely you’ll be phased out of qualifying for various deductions or credits.

3. Your standard deduction will go up

Couples filing jointly for the first time this year can expect to see their standard deduction double: For 2015 taxes, the standard deduction for single filers is $6,300; for married filing jointly couples, it’s $12,600.

However, with two people’s expenses in the mix, it’s possible that you may choose to itemize your deductions this year—you’ll just have to do the math to see if it’s worth it. For instance, one of you may have made a lot of charitable contributions this year, or may own a home through which you qualify for a lot of home-ownership-related deductions—it would be worth itemizing deductions on your joint return only if they add up to more than $12,600.

Just keep in mind that if you’re married but filing separately, deductions can get a little tricky, because “if one spouse claims itemized deductions, the other spouse has to claim itemized deductions even if they don’t have any—and both spouses can’t claim the same itemized deductions,” Poulos says. In other words, you will have to decide as a couple who gets to claim which deduction on your separate 1040s.

Additionally, couples who make over $309,900 will see a phase-out of the value of the itemized deductions thanks to a tax provision known as the Pease limitation, says Greene-Lewis. “Pease limitations reduce the amount of itemized deductions that high income earners can take, like mortgage interest, charitable contributions, and property taxes,” she adds. “Every year there is an income threshold amount set where the limitations will kick in.”

4. You might owe money on those months spent single

One of the most surprising things that couples learn when filing taxes is that whether you got hitched on January 1 or December 31, the IRS counts you as “married” for that entire calendar year.

“The biggest challenge to a lot of couples is they end up owing taxes because they were under-withheld [during the portion of the year they were single],” Poulos says. This would especially be the case for couples who get bumped into a higher tax bracket as a result of their joint income, as we saw for the couple earning $80,000 each in No. 2. Ultimately, they may end up paying more in taxes to make up for what they didn’t pay while they were in their lower, single-person tax bracket.

That said, most married couples tend to fall on the side of fitting into lower tax rates at higher combined incomes, says Greene-Lewis. Plus, there’s still the higher standard deduction and being eligible for additional tax deductions and credits you may not have been able to take in the past. Generally speaking, “all of these factors allow a couple that files ‘married filing jointly’ to have lower tax liability,” she says.

Tax season brings fear of audits

Tis the season for taxes, as millions of Americans are filing for returns between now and April. But for some, this time of year also comes with the dread of a possible audit from the Internal Revenue Service (IRS).

"There's an urban myth that the IRS is some kind of Gestapo and that's simply not the case," says Donald Williamson, a certified public accountant with three decades of experience and the Executive Director of the Kogod Tax Center at American University in Washington, D.C.

According to the most recent data from the IRS, the odds of being audited are extremely low. In fact, it was less than one percent for middle income earners who filed in 2014. Those tend to rise as income levels rise, unless a person reports that they made no money, which is a red flag.

For those who are contacted for audit, the process isn't as arduous as one may think.

"What you see in the movies is probably the IRS agent knocking on your door, but a lot of the times you just get a letter from the IRS," says Jean Pawlow, Co-Chair of the Tax Controversy Practice at McDermott Will & Emery LLP, in Washington, DC. "Just because you've gotten a letter from the IRS doesn't mean that you owe more money or that you owe more taxes. A lot of times the IRS just has a question."

Pawlow and Williamson point out several reasons as to why a taxpayer could get that letter from the IRS.

The first is failure to report all of your income. Employers and financial institutions send the IRS documents on what they've paid out and to whom. If a taxpayer's income tax filing does not match those records, the IRS will want to know why.

Another red flag that could trigger an audit are excessive deductions. The IRS keeps thorough records for comparison as taxpayers file for returns from year-to-year. A big jump in deductions could raise attention.

Budget cuts have also taken a toll on how the IRS is able to conduct the audits that do require more than a letter.

"We have seen a difference in our business," Pawlow says of her firm's experience. "We more often do the traveling instead of the IRS doing the traveling. We do things more often by phone calls now instead of in person meetings. Things sometimes take longer to resolve."

Experts say that good recordkeeping is the best way for taxpayers to be ready for tax season, as well as for any possible audits from the IRS.

Williamson says, "The time to do tax-planning and think about your tax return is not in March but in the 12 months preceding March, sometime in 2015. That's the only time one can really think about arranging their lives in a most tax efficient manner."

Williamson also points out, that if you do get a letter from the IRS, try not to take it personally.

The deadline for filing 2016 tax returns is Monday, April 18.

7 Reasons to NOT Procrastinate on Taxes

Some folks are procrastinators. They wait until the last minute to do everything from getting up in the morning to finishing work assignments to cleaning up the garage. But even those with no history of laziness can find working on taxes to be such a traumatic experience that it instills lethargy in even the brightest and most efficient worker bee.

So if you are looking for a good reason - or a good kick in the posterior – to get going on this year’s tax return, consider the following:

Quick Turnaround. Your tax pro is still in pre-manic-panic mode. Admittedly, tax professionals nationwide are geared up and have probably been going at it for a solid month now, but it’s still early enough in the season that they are not beyond stressed. This means they will have the time and energy and sharpness to speak with you about your tax matters, accurately and completely prepare your tax return, and take the time to seek out additional deductions or methods to minimize your tax liability. Plus the turnaround time is probably considerably shorter than it will be a month from now. If you wait until the end of March or beginning of April when his or her eyes are glazed and they are verging on a nervous breakdown, you may not receive the same benefits.

Accuracy. It’s not completely up to your tax pro to ensure accuracy. You are the person most aware to your financial life. By getting your data together early on, you can take the time to review your tax return to ensure completeness and accuracy. Stan Veliotis, Associate Professor at Fordham University, Gabelli School of Business states, “The sooner you start preparing it, the sooner you can identify needed information. You can avoid errors by double checking the return before filing.”

Last Minute Tax Planning.  Wouldn’t you rather know now how much you will owe the IRS and the state versus waiting until April 15?  What if the bill is huge? What if you thought you were getting a refund but instead you owe? If you have already prepared the return, you give yourself more than a month to save up, get a loan, or make last minute changes that will bring that number down. Veliotis says, “The sooner you start preparing it, the sooner you can figure out if you want to take actions by April 15, 2016 such as fund an IRA for 2015.”

2016 Estimated Tax Payments. If you are subject to making estimated tax payments, those payments for 2016 are based on your 2015 liability. Your first installment for 2016 is due on April 15, 2016. Preparing the return now gives you the opportunity to save for not just what remains to be paid for 2015, but to save for that first 2016 installment and make that payment in a timely manner.

Returns Needed for Other Purposes. If you have kids in college and need to provide tax returns to the college for financial aid purposes, you should get a head start. Colleges usually want that information in February. Or if you plan to purchase or refinance a home or need a loan for other purposes, the lender will want a copy of your income tax return. A loan could be held up if the return is not ready.

Prevention of Penalties. Some procrastinators become nonfilers. Next thing you know years have gone by and taxes have not been filed or paid. Once you slip into this category, you can become scared and anxious. Plus it becomes very expensive. There is “failure to file” penalty as well as “failure to pay” penalty and interest to pay. Even if you have filed an extension, if you did not pay the tax that was due with the extension form, you will be subject to a penalty of 5% per month (up to 5 months) of unpaid taxes. There is no extension of time to pay, only an extension of time to file. And of course, the Catch 22 is that you don’t know how much you will owe unless you prepare the return. So if you prepare the return, you might as well file it rather than apply for an extension. According to Veliotis, “If enough time goes by without having filed you could be subject to possible criminal charges.”

Lose your Refund. Early in the tax season, returns are quickly processed and refunds fly from the IRS coffers. But as the months progress, it takes the IRS longer to process and provide refunds. So it takes longer to get your money back. But the worst case scenario applies to procrastinators who become nonfilers because they face the statute of limitations. Taxpayers have until the later of three years from the date of the original deadline of the tax return (including extensions) or two years from the date the tax was actually paid to claim a refund of overpaid taxes from the IRS. For example, your 2015 tax return is due on April 18th, 2016. Add three years to this filing deadline, and you have until April 18th, 2019, to file your 2015 tax return and still get a tax refund. If you file your 2015 return after April 18th, 2019, then your refund expires. It goes away forever because the statute of limitations for claiming a refund has tolled. And let’s say you owe other taxes from a prior or subsequent year; you cannot apply that expired refund to the remaining tax debt.

Right now is the best time to start planning for next year’s taxes

With the recently passed Protecting Americans from Tax Hikes (PATH) Act providing more certainty to tax laws (as certain as anything can be when talking about Congress), the time to do your year-end tax planning should start earlier in the year.

And what better time to think about this year's taxes than when completing last year's taxes?

A great place to start is to look at your current tax return. If you use a tax preparer, ask them to review the return with you and point out certain areas of the return where you could have reduced your taxes.

If you prepare your own taxes take a look at your return and then consider the following.

Non-cash Donations

Most people are aware that they can deduct cash donations made to qualified charities as long as they itemize their deductions. However, donations of property can be deducted as well.

Rather than waiting until the end of the year to make these types of donations, make them now and throughout the year. The charity will benefit as will you, since you won't be scrambling around at year end.

Increased 401(k ) contributions

The tax code is littered with tax deductions that apply only to taxpayers whose income is at or below a certain amount.

Deductions for student loan interest, college tuition, medical expenses, deductible IRA contributions and personal and dependency exemptions are just some of the tax deductions that are subject to income limitations.

Increasing your 401k contributions in of itself may not save you a lot of taxes. This is because when you increase your 401(k) contributions you reduce the amount of income that is used to calculate how much tax to withhold from your paycheck.

However, increasing your 401(k) contributions does reduce your taxable income, which could result in additional deductions for some of the items mentioned above. And while most of the deductions gradually phase out as your taxable income increases, there are several which do not phase out and instead are not deductible as soon as the taxpayer has one dollar more than the limitation.

The best part about increasing your 401(k) contribution earlier in the year is that you spread the increase over more pay periods, which reduces your take home pay less than if you wait until the end of the year to increase your 401(k) by the same amount.

Make a tax deductible IRA contribution

The rules for taking a tax deduction for an IRA contribution are a bit confusing. However, if you are able to take a deduction, the value of the deduction will have a greater impact on the amount you owe or refund you are due, than the same amount contributed to a 401(k) due to the payroll withholding decrease described above.

Contrary to what many people think, it may be possible to take a tax deduction for an IRA contribution and still contribute to a 401(k).

For single taxpayers who are covered by a retirement plan such as a 401(k) plan, they can still take a full tax deduction, up to the contribution limit ($5,500 for taxpayers under age 50; $6,000 for taxpayers over age 50) if their adjusted gross income (AGI) is $61,000 or less. The deduction begins to phase out between $61,000 and $71,000 with no deduction allowed once AGI reaches $71,000.

For married taxpayers, a spouse who is covered by a retirement plan at work can take a full tax deduction, up to the contribution limit, if their AGI is $98,000 or less. The deduction begins to phase out between $98,000 and $118,000 with no deduction allowed once AGI reaches $118,000.

For married taxpayers where one spouse is not covered by a retirement plan at work, the non-covered spouse can take a full tax deduction, up to the contribution limit of their AGI is $184,000 or less. The deduction begins to phase out between $184,000 and $194,000 with no deduction allowed once AGI reaches $194,000.

Sharp readers may note from the above that increasing your401(k) contributions in a given year may reduce your AGI low enough that you can take a tax deduction for an IRA contribution as well.

The above are some of the more common planning strategies that can be employed earlier in the year and help you save income taxes.

You should still review your tax situation as the year progresses to fine tune or make adjustments especially in light of any changes that may occur during the year. Making this a habit each year at tax time means you're less likely to forget and have to play catchup in December.

Things to Consider Before Hiring a Tax Pro

Tax law gets more and more complicated with each year that passes. And with the passage of ObamaCare, which is administered by the Internal Revenue Service, even taxpayers with only a W2 are finding that the preparation of their income tax returns can be quite a challenge. Much of the data associated with your healthcare is now required to be included on your tax return.

There are approximately 100,000 pages of tax code and I’m sorry, but there isn’t a tax software product out there that can guarantee to translate your situation onto the proper forms. It really is important to understand tax law or at least hook up with a professional who does understand it and can help you provide the IRS and your state taxing agency with error-proof income tax returns. Keep in mind, in the final analysis, it is you, not the preparer who is responsible for the content of your tax return.

Who should you turn to? It’s important that you choose a preparer who is qualified and licensed. A statement released by the IRS says, “Attorneys, CPAs and enrolled agents can represent any client before the IRS in any situation.” And those are the titles you should look for when shopping for a tax pro.

Many states allow unlicensed individuals to prepare income tax returns. However, beginning in 2013, individuals who are tax return preparers and prepare all or substantially all of a tax return or claim for refund must obtain a preparer tax identification number (PTIN) through the Internal Revenue Service. Signing and nonsigning preparers are subject to the PTIN requirement. Make sure your preparer has a PTIN.

Why not select someone referred to you by the Internal Revenue Service itself? According to the IRS, “Taxpayers may search the directory using the preferred credentials or qualifications they seek in a preparer, or by a preparer’s location, including professionals who practice abroad. Tax return preparers with PTINs who are not attorneys, CPAs, enrolled agents or Annual Filing Season Program participants are not included in the directory, nor are volunteer tax return preparers who offer free services.”

That is a good start. But just because they are referred by the IRS doesn’t mean they are 100% reputable or even a good fit for you. You might want to check Yelp for reviews, check with the Better Business Bureau to see if there have been any complaints. If you are dealing with a CPA call the Board of Accountancy in your state to ensure their license is active. For attorneys, check with the State Bar Association. For Enrolled Agents, go to IRS.gov and search for “verify enrolled agent status” or check the Directory. 

Find out the fee you will be charged for the services provided. Is it reasonable? Stay away from preparers who charge a fee based on a percentage of your refund – especially if you are entitled to the Earned Income Tax Credit. You could end up paying an exorbitant sum compared to what other reputable preparers would charge. Also avoid those who boast bigger refunds than their competition – are they making up numbers to achieve that goal? And make sure that your refund goes directly to you – not into your preparer’s bank account.

Paid preparers who compile more than 10 tax returns annually are required to electronically file your tax return. Make sure your preparer offers IRS e-file services. According to the IRS, it “has safely processed more than 1.5 billion e-filed tax returns.”

A conscientious preparer will exercise due diligence by asking to see your records and receipts. He or she will ask questions to ensure that you are taking advantage of all deductions to which you are entitled and that you are declaring all income that must be reported. Do not use a preparer who will e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.

Never sign a blank tax return. And don’t use a tax preparer that asks you to sign a blank tax form. You wouldn’t sign a blank contract, would you?

Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before it’s signed and filed. If you’re a non math type, ask a friend or relative to review your source documents and the tax return to ensure its accuracy. Then sign it and file it.

Do not use a preparer who refuses to sign the return. Check page 2 of your Form 1040 to make sure the return is signed by the preparer and includes his or her PTIN number in the field beside the signature box. By law, paid preparers must sign returns and include their PTIN. If the signature box says “self-prepared” do not file it. Take your documents and find a reputable preparer.

Be sure you get a copy of your tax return. If the preparer provides a PDF version to be stored on your hard drive, ask for it to be password protected.

Make sure the preparer’s office is open year round. If you get a nasty letter from the IRS in June or if you want to do some tax planning during the summer months, or if you are notified that you are being audited, you will need to contact your preparer after this year’s April 18 due date. Avoid fly-by-night preparers.

And if things do not go right and you feel that your preparer has violated ethical standards, report them. The IRS states, “Most tax return preparers are honest and provide great service to their clients; however, some preparers are dishonest. Report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms on IRS.gov at any time.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.”

Investors: Don't let taxes tax you

FROM USATODAY

Your online broker only has a week left to get your 2015 tax forms to you. You don't need to hold your breath: These documents don't have to fill you with dread.

Calculating taxes on your dividends and other investment income doesn't have to be a nightmare. Tax experts point out tax code changes for investors in 2015 are modest and largely unchanged for many investors. Surviving the season is just a matter of being prepared. Here are a few tax-time pointers for investors to keep in mind:

* Keep a lookout for your tax document. Brokers are required to postmark the consolidated 1099 documents - which show all the taxable events for 2015 - by Feb. 16. If you owned any real-estate investment trusts, or REITs, you should expect to get your documents closer to Feb. 16, according to TD Ameritrade's Web site. REITs often reclassify their distributions in January and February, so brokers like to wait to send 1099 documents for investors who own these investments to reduce the need for corrections. If you didn't own own REITs and didn't place any trades, many brokers will have mailed out forms or made them available online by the end of January.

* Consider importing investment tax information. The Internal Revenue Servicemade a number of changes to the ways stock gains were reported years ago, leading to more complicated 1099 document, says Bob Meighan, a  CPA and vice president at TurboTax. Brokers are required to track the cost basis on stocks that were bought recently, instead of leaving that up to investors. This saves investors some calculation trouble, but makes the 1099 form more complicated as some securities are "covered" by the new rules and some are not, leaving the cost basis tracking to the investor. None of this is new - but as time goes on - it become easier to deal with. Meighan recommends users import their tax form directly from brokers into tax-preparation systems to reduce errors. "Now it's a turn key thing," he says. "It's done for you." He said 1.4 million brokers and financial institutions will now download data to TurboTax.

* Don't forget retirement savings. One of the smartest things investors can do to reduce taxes is contribute to retirement accounts, says Gina Chironis, a CPA at Clarity Wealth Management. Not only can contributions be made in many accounts until taxes are due in April, but some investors can earn a saver's credit if their adjusted gross income is below certain thresholds, she says. She urges recently retired people to contribute to a Roth IRA, even if they're over 65 years old, shield future earnings from taxes and see if they might qualify for the credit.

* Consider the desktop version of tax-prep software. Most taxpayers who use tax-preparation tools use the Web-based version. But investors might find the actual download or CD-based software to be their best bet, Meighan says. For one thing, with the software version of TurboTax that's installed on a computer - not operated online through a browser - the investor can easily flip between the data entry sheets and the Schedule D where gains and losses are recorded. The Web based product requires the investor to keep downloading the PDF of the entire tax forms to see what the actual document looks like, Meighan says. "The online tax customer is different than investors," he says. Additionally, aggressive discounting by retailers can often make the computer software slightly less expensive than the Web version.

So, keep a look out for those tax forms from your broker. And remember, it's never too late to think about next tax year. The fact the stock market is in a correction now might create interesting opportunities to sell your dogs so you can get a tax break - next year. "If you have a stock you're thinking about getting rid of, you can trigger the loss for your taxes," Chironis says

Deducting your Nondeductible IRA losses

When Congress authorized IRA accounts, I don’t think it considered the possibility of a loss. IRA accounts are savings for retirement, and who would ever think that their retirement savings would eventually add up to less than the amount they contributed?

Distributions from retirement accounts, including IRA accounts, are taxable to the extent that the amount of the distribution exceeds the tax basis. In your situation, the tax basis in your IRA account is the sum of each year’s nondeductible contribution. If your total nondeductible contributions add up to $20,000 and they were not deductible, then your tax basis would also be $20,000. If the value of your IRA had grown to $30,000 and you withdrew the entire amount, you would have to pay income tax on $10,000 — the difference between the amount you took out and the amount you put in.

If the amount now in your IRA is less than your tax basis you can deduct the loss. Here’s an example. Let’s assume your contributions totaled $20,000 and your account is now worth $12,000 and you withdraw the entire amount. Potentially, you have an $8,000 deductible loss. Here are the steps you must follow to claim it:

You must withdraw all the money in your traditional IRA account (and if you have more than one traditional IRA account, you must withdraw all the money from those accounts, too).

If the total amount you take out is less than your total tax basis in the account, then you have a loss that you can claim on your tax return.

When you prepare your income tax return, you will report the $12,000 withdrawal on the front page of your Form 1040 as the gross amount of your IRA distribution. On the same line, you will report a taxable amount of zero.

You can claim your $8,000 loss as a miscellaneous itemized deduction on Schedule A subject to the limit of 2 percent of your adjusted gross income. So you add the $8,000 loss on your IRA to your other miscellaneous itemized deductions (tax preparation fees, deductible employee expenses, deductible investment expenses, etc.).

Don’t forget to exclude your miscellaneous itemized deductions when you figure your alternative minimum tax (AMT). If your AMT is higher than your regular tax, then you lose some or all of the deduction for the loss in your IRA.

If you are lucky and you make it through the above IRS hoops, you get to deduct the loss.

Tax planning’s a smart step before marriage

Statistics show that the “for richer or poorer” wedding day promise tends to be one of the biggest problems among married couples – particularly when they don’t discuss issues such as tax status and financial preferences, priorities and plans ahead of time.

We have listed several top-of-mind items that we encourage all soon-to-be married couples to consider before the big day arrives.

Filing status: Your marital status on Dec. 31 determines your tax filing options for the entire year regardless of when you marry during 2016. So even if you get married on Dec. 31, you’ll be considered married all year when you file your 2016 return. You can either file jointly with your new spouse, or use married filing separate status for a separate return. You should project your tax bill using both methods so you can determine which alternative results in the least amount of combined federal and state tax.

Will you receive a marriage tax penalty or bonus? For many couples, getting married results in a lower tax bill compared to the “single” filing status. This often occurs if one spouse earns significantly more than the other. Couples that earn similar amounts may wind up paying more combined federal and state tax. This is especially true for higher income earners due to the tax rates that were imposed by the American Taxpayer Relief Act of 2012 (ATRA). ATRA created a new 39.6 percent top tax bracket, which for 2016 starts at $415,050 for single filers and $466,950 for couples filing jointly. For example, if you each make $250,000 per year, unmarried, neither of you would be subject to the 39.6 percent rate. Married, you would pay the top rate on $33,050. This same disparity between single filers and married couples appears in two new taxes created by the Affordable Care Act. It imposes a 0.9 percent tax on earnings and a 3.8 percent tax on investment income for higher income earners ($200,000 for singles and $250,000 for couples).

ATRA also reinstated the phase-out of personal exemptions and limits itemized deductions for higher income taxpayers. Effectively, limiting deductions is a backdoor tax increase which impacts higher earning married couples.

Are there other tax benefits to being married? There are a few. For example, the tax law allows you to avoid paying tax on up to $250,000 of gain on your primary residence. If you are married, the exclusion is $500,000 in most cases. You also may be able to deduct a greater amount of itemized deductions when you combine expenses such as charitable deductions and state and local taxes on a joint return.

Married couples also get more bang for their buck when it comes to the gift tax exclusion. Currently, there is an annual federal gift tax exclusion of $14,000 for 2016. As a married couple, you get to combine this exclusion allowing joint gifts of $28,000 to any one person.

What about children? Have kids or planning on them? No tax benefit is more appealing to child-rearing couples than the additional exemption deduction for each child. Additionally, the Child Tax Credit is available to families (subject to income limitations). This credit enables couples to reduce their tax liability by as much as $1,000 per every “qualifying child.”

Discussing money and taxes may not be the most enjoyable part of planning your new lives together, but it’s probably one of the most important for long-term success. Seek outside advice from a financial professional to be sure that you are off to a good start!

Do Tax Preparers Know What They're Doing?

FROM BLOOMBERG.COM

For several years, researchers have been sending people into tax preparation offices to test the quality of the work. The results have been scary:

• A tax preparer in North Carolina wasn’t sure what to do with one client's dividend income form. She decided to just ignore it.
• At a major tax prep chain in Florida, “the preparer seemed to want to help me with owing less, but was unsure how to go about it,” a client told researchers. The preparer tried clicking and unclicking various fields on her computer, explaining that “sometimes it made customers owe less.”
• An independent preparer deducted car expenses from a return. The client didn’t own a car.
• A New Mexico tax preparer asked plenty of questions, but then forgot (PDF) to list her client’s daughter as a dependent—even though the daughter attended the tax session.
• A second New Mexico preparer needed to ask a supervisor how to round a number to the nearest whole dollar.

Such incompetence isn’t hard to find. Last year, the National Consumer Law Centertested (PDF) 29 tax prep offices and found only two forms completed correctly. Just two of 19 preparers randomly selected by the U.S. Government Accountability Office calculated the correct refund amount in 2014. One GAO tester was told that income didn’t need to be reported to the Internal Revenue Service if it was reinvested in a mutual fund.

The studies aren’t big enough to generalize about tax preparers. No doubt, there are many well-educated practitioners—professionals who really know tax law, or at least basic math.

The problem is that it’s hard to be sure your preparer knows what he or she is doing. Almost anyone can claim to be a tax preparer; no CPA, law degree, or formal education is required. Pretty much the only thing you need to open up shop is a tax identification number, which the IRS gives out for a $50 fee.

Consumer groups are pushing federal and state lawmakers to impose tighter rules on preparers, requiring certification and education. A Consumer Federation of Americasurvey (PDF) released on Jan. 19 found that 80 percent of 1,011 respondents supported the idea of requiring tax preparers to pass a test.

While large tax prep companies, including H&R Block Inc., support tighter regulations, new rules are opposed by many independent tax preparers. Representing them is Dan Alban, an attorney at the Institute for Justice who in 2014 successfully used federal courts to block new IRS regulation of tax preparers.

“Licensing doesn’t ensure that people are honest,” Alban said, arguing that education requirements would do little to fight fraud by tax preparers who try to inflate customer refunds (and thus, their fees). Burdensome rules would only push part-time and mom-and-pop preparers out of the business, driving up prices and benefiting larger firms, he said. And it’s not clear if uncertified preparers are any worse than CPAs or attorneys who do taxes. 

“Just about every tax return has an error on it,” Alban said. “That’s because the tax code is so complex.”

Consumer groups counter that the lack of standards has turned tax preparation into a quick way to make a buck, rather than a true profession. “Preparer regulations won’t eliminate all mistakes,” said Chi Chi Wu of the National Consumer Law Center (PDF). “By having a profession that is tested and trained, you raise the level of professionalism. You give businesses and people who are licensed an incentive not to commit fraud or be sloppy.”

Paul Harrison, director of the tax clinic at the Chicago-based Center for Economic Progress, must regularly clean up messes made by tax preparers. He has often found dumb mistakes that, while boosting a client’s refund, are easy for IRS computers to spot. Examples include ignoring income from a 1099 form or twice deducting car expenses by utilizing both mileage and the standard deduction. "If you were trying to scam the IRS and the taxpayer, you wouldn’t put such a glaring mistake in a return," Harrison said.

It’s the taxpayers who end up suffering from these blunders. Even if they get a larger refund in the short term, they must eventually pay when the IRS spots the mistake. By then, refund checks have commonly been spent. 

How can taxpayers find competent tax preparers? A year ago the IRS launched adatabase of tax professionals who voluntarily provided proof of their education and credentials. In addition to CPAs and attorneys, the list includes “enrolled agents,” who go through at least 72 hours of tax courses every three years.

Taxpayers can also download some software and do their taxes themselves. They'd be taking chances, but the odds are in their favor: The GAO estimates that half of all self-prepared individual tax returns contain at least one error, compared to 60 percent of returns completed by a paid preparer.

How Some Americans Hit the Maximum Tax-Refund Sweet Spot

FROM WSJ.COM

Aggressive tax planning isn’t just for the rich.

A new study shows how low-income households frequently report the exact right amount of income to get the maximum refundable tax credit from the Internal Revenue Service. And they follow the tax law from year to year, adjusting their income to fit changes that Congress makes.

Consider, for example, a married self-employed couple with two children. They pay payroll taxes, but make too little money to owe income taxes. Instead, they’re eligible to get tax credits designed to encourage work and help them raise children.

In 2012, to get the maximum refund of about $5,070, they had to report about $16,200, which happens to be the point where the entire $1,000-per-child tax credit becomes fully refundable. Any additional income wouldn’t yield a bigger tax credit. That led thousands to “bunch” their income around that point, according to the paper fromJacob Mortenson and Andrew Whitten, economics graduate students at Georgetown University who also work at the congressional Joint Committee on Taxation.

Then, in 2013, the expiration of a payroll tax cut changed the math, because it raised taxes that self-employed people report on their income-tax returns, reducing the incentive to report more income. That year, to get the maximum credit of about $4,890, the same couple had to report income of about $13,600, which just happened to be the income threshold for the maximum earned-income tax credit, or EITC. That’s what thousands did.

How do they do it? Even if you’re not a tax expert, software and shady tax preparers make it incredibly easy to fiddle with the numbers until you hit the sweet spot that shows the maximum refund. Indeed, previous studies had found such “bunching” around the EITC maximum.

What makes this study so interesting is the way it documents the year-to-year movement to different “kinks” in the tax code. The researchers used data from states without their own income taxes, which can create localized trends that obscure the overall movement.

Some of the maneuvers used by taxpayers can be borderline legitimate. A taxpayer could refuse to take real deductions to keep self-employment income artificially high.

Some are dubious. You can hit the threshold by reporting real income you might otherwise hide, like the $500 in cash you earned for odd jobs that the IRS would have no other way to know about. Or you can just completely fake it and make up numbers. That’s illegal.

Oh, there’s a catch.

All these data are taken from tax forms submitted by taxpayers. That is, they don’t reflect IRS audits, and the agency won’t discuss whether the computerized filters it uses to flag returns for auditing look for people seeking the maximum credit.

Because of a history of fraud and errors, returns with refundable credits do draw extra attention from the IRS, and the agency included inflated income claims on its list of theDirty Dozen tax scams last year.

“Scam artists don’t miss a trick and they can entice taxpayers to falsely inflate income on returns to claim tax credits they are not entitled to receive,” IRS Commissioner John Koskinen said last year. “Taxpayers are ultimately responsible for the information on their tax returns, and I urge everyone to file the most accurate return possible.”

How to Use Tax-Loss Harvesting to Reduce Your Taxable Income

You might be looking out your window at the slush and snow and thinking "what is he talking about?" You'd be right to wonder, if "harvest time" brings to mind rolling fields and tractors.  However, I'm not talking about amber waves of grain, but rather saving you some green, through tax-loss harvesting. Tax-loss harvesting may be an opportunity to reduce your taxable income, softening the blow of a down market.

The long and short of it

In short, a tax-loss harvest occurs when we sell poorly performing positions in taxable accounts and use the losses to offset taxes on any capital gains.  In addition, up to $3,000 of losses, in excess of investment profits, can be deducted against ordinary income, increasing your portfolio's tax efficiency.  This is another reason that having a balanced and diversified portfolio is beneficial, as it increases the potential for tax-loss harvesting.

For example, if you make an investment of $100,000 in a taxable asset, and it falls to $90,000, you could sell it and "harvest" the$10,000 loss by claiming it against other taxable gains.  In some cases, you may be able to claim the loss against up to $3,000 of ordinary income.  Suppose you have gains of $5,000 from another asset, those gains would be offset by $5,000 of your $10,000loss.  You can then use $3,000 of your loss to reduce your ordinary income.  The remaining $2,000 may be carried forward to the next tax year.  Of course, as with anything involving tax law, it isn't always that straightforward.

It's a wash

I'm sure you've heard the colloquialism "it's a wash;" it definitely applies to loss harvesting, in the form of the "wash sale rule."  The wash sale rule is the Internal Revenue Service's way of dissuading you from selling assets for the sake of the tax write-off, so there are several things to keep in mind to make sure you're not violating this rule and negating your potential tax benefits.

• You cannot, within 30 days before or after the sale, make a "substantially identical" asset purchase. This will prevent you from claiming the loss on your taxes.
• The rule applies to multiple accounts held by a taxpayer, as well as his or her spouse, including IRA's and Roth IRA's.

Not for everyone

However, there are some instances that may make tax-loss harvesting less than ideal.

• It may not benefit clients who are eligible for the 0% capital gains tax rates.
• Realizing tax losses lowers tax basis, which makes harvesting harder to do the longer the portfolio grows and may potentially present other tax planning challenges in the future, especially if you are in a higher tax bracket.

Like so many investment strategies, tax-loss harvesting might not be the perfect strategy for every investor, but its potential benefits warrant a discussion with your CPA.  If not this year, maybe next—like a farmer planning a crop rotation during the winter months, there's never a bad time to think about your asset allocation and start planning ahead.  The market, like the weather, can be unpredictable, but as a personal financial advisor, I always like to be thinking ahead and looking for innovative ways to put my clients' wealth to work for them.  It may be the first quarter now, but the fourth quarter, like harvest time, will be on the horizon before you know it.