Ahh, taxes. The most fun topic to discuss, am I right? Kidding, kidding. We know talking about taxes isn’t at the top of your to-do list, but discussing it before getting married is super important. Why? Well, marriage intertwines the financial lives of two people–assets, debt, taxes, etc. You and your partner should be on the same page regarding how you will handle taxes during your marriage. The best news? You can knock this convo out during the prenup process. It’s just one other thing to openly discuss while sorting out your life together during the prenup process. In other words, yes, you can include a clause about income taxes and how you want them to be treated during your marriage. Come along with us as we dive into the practicality and foresightedness of incorporating an income tax clause into your prenuptial agreement, shedding light on how this provision can foster transparency and financial resilience within a marital partnership.
Understanding Prenuptial Agreements
First things first, let’s make sure you understand what a prenup is and how it works. A prenuptial agreement, or a “prenup,” is a legally binding contract that couples may enter into before exchanging vows. This contract can cover anything from asset ownership to insurance to pets and everything in between. There are a few topics off-limits, including child support, child custody, and anything illegal.
Prenups can help couples set expectations for the marriage with one another, including whether or not they’ll have a joint bank account, file taxes together, have children, and so on and so forth. It is a great communication tool to start a marriage with a strong foundation of understanding and trust.
Why having an income tax clause matters
Financial transparency, financial transparency, financial transparency. Being clear with finances before entering into a marriage is a great way to get your marriage started off on the right foot. If there is financial incompatibility or mismatched expectations, it could lead to disaster. That is why including an income tax clause in your prenup is just one important piece of the financial puzzle in a marriage. It seems simple, but being on different pages regarding taxes can actually cause issues for marriage. Imagine this: one person is all for filing taxes together, while the other swears by filing solo. If they can’t agree on this, it’s not just a harmless disagreement. For example, someone might miss out on a hefty tax return because their partner insists on individual filing instead of joint filing. It’s not just a difference of opinion; it could mean waving goodbye to some serious cash. And, yep, you guessed it, this could cause major friction in the relationship.
Enter: the income tax clause in a prenup. The income tax clause in a prenup lays out exactly what each party expects to happen when it comes to filing taxes in the marriage. This sets expectations, creates financial transparency, and, ultimately, a better foundation for a joint financial union.
What can an income tax clause say?
This clause can comprehensively address a spectrum of income tax intricacies, including but not limited to:
Tax Filing Status
Clearly define the preferred tax filing status, whether you leave it undefined (a.k.a., let’s decide later), let one person be the decision maker on how to file (Spouse A to decide), or specify exactly which you will do: separate or joint filing.
Requirement to Provide Financial Documents
If the parties stipulate a joint filing status, then one or both parties may be required to disclose income information to the other. They can include in the tax clause that both parties are required to provide income statements to ensure that both spouses are complying with their agreement to file jointly.
Preparation of Returns
Deciding on which partner should be responsible for preparing taxes. For example, Spouse A and her tax advisors are responsible for preparing tax returns, while Spouse B may have access to review if desired.
This means one party takes on all of the liability for tax levies, assessments, or fines arising out of the joint returns. This may be especially important if one party stipulates handling the returns themselves.
Tax Planning in the Event of a Divorce
You can also include what you would like to happen to taxes in the event of a divorce in regards to taxes. For example, stating that you would like to continue to file joint taxes during the pendency of a divorce.
The Filing of Joint Tax Doesn’t Create Community/Marital Property
Adding a statement that clarifies that if you do choose to file jointly, it doesn’t mean that this act of pooling your income together means you are creating joint property. This is especially important if you and your partner have designated income or other assets as separate property.
The bottom line is that including a tax return clause in your prenup may be a good idea!
While the intricacies of income tax discussions may not be the most romantically charged aspect of wedding planning, discussing how you want taxes to be treated during your marriage is logical, reasonable, and practical, which is romantic to us! The incorporation of an income tax clause into your prenuptial agreement can be viewed as a strategic investment in the long-term success and financial resilience of your marriage. This provision creates a framework for navigating the complexities of joint finances and encourages open communication about your shared financial future.
Nicole Sheehey is the Head of Legal Content at HelloPrenup, and an Illinois licensed attorney. She has a wealth of knowledge and experience when it comes to prenuptial agreements. Nicole has Juris Doctor from John Marshall Law School. She has a deep understanding of the legal and financial implications of prenuptial agreements, and enjoys writing and collaborating with other attorneys on the nuances of the law. Nicole is passionate about helping couples locate the information they need when it comes to prenuptial agreements. You can reach Nicole here: [email protected]