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!