What You Need to Know About Marriage and Taxes

Apr 14, 2022 | Finances, Prenuptial Agreements, Relationships

If you’re happy and you know it, clap your–wait, no, that’s not right. If you’re mentally and emotionally drained after filing your taxes and bleeding money, clap your hands! That’s how the song goes, right? Although getting married doesn’t change the stress and white hairs that come with tax season (unless you can get your spouse to file your taxes for you), it might just save you money. Probably. In this article we’re going to delve into how marriage can change your tax situation, for better or worse. What happens depends on your specific situation, so we’ll cover a range of possibilities in order to give you knowledge you can take forward in determining what you should expect from taxes after marriage in your specific situation. 

Potential Advantages

Double Savings: If you’re married filing jointly, you can claim double the standard deduction (the portion of income that is not subject to taxes). In 2019 the standard deduction was $24,400 for married couples filing jointly (Taylor, 2019), which was $400 more than in 2018. It jumped another $400 in 2020 (Forester, 2021). This year, in 2022, it will be $25,900 (Efile, 2022). And if one of you is over 65 years old, it’s also $1,400 higher than otherwise–double if you’re both over 65 (Berry-Johnson & Bailie, 2021). This perk is particularly relevant for those of you entering into your second marriages at a more mature age. Maybe this is part of why second marriages are twice the fun!

Home Sale Exclusion: Did the two of you sell a home together that you lived in for at least two of the past five years? Great news: Up to $500,000 of gains from the sale of the house can be excluded from taxation. Of course, you need to file jointly to claim this benefit. Singletons and married couples filing separately can only exclude $250,000 (Taylor, 2019).

IRA Accounts: If you and your spouse elect to have one of you working while the other stays home, the spouse who doesn’t earn income can still enjoy tax benefits of a traditional IRA account. How? The spouse who works is able to open an IRA in their partner’s name. They can then make spousal contributions, which are tax-deductible (Taylor, 2019). 

Child Tax Credit: Single filers and married couples filing separately can only make up to $200,000 in adjusted gross income before they’re no longer eligible for the full child tax credit. However, when married filing jointly, this figure doubles to $400,000 (Taylor, 2019). 

No Gift Tax: If you transfer money to your partner as a gift while engaged or in a relationship, that money will be subject to a gift tax. After marriage, you can transfer unlimited amounts of money to one another without it being subject to gift tax (Hello Prenup, 2021).

Potential Disadvantages

Marriage Tax Penalty: Most of the time when you get married, others give you wedding presents. Unfortunately, the IRS didn’t receive this memo. Instead of giving some couples the gift of tax advantages, sometimes they demand that you give them a gift when you get married–in the form of the marriage tax penalty, particularly if one or both of you is a high earner. 

Luckily, the marriage tax penalty was mostly (but not completely) abolished in 2018. Before 2018, because of the way tax brackets were set up, many married couples who were both working ended up being subject to more taxation when filing jointly than if they were to file separately. In 2018 the IRS made changes to most tax brackets such that the married filing jointly tax brackets became exactly 2x the married filing separately tax brackets in most cases and the married filing separately tax brackets became comparable to the single filer tax brackets (H&R Block, 2021). 

Since then, the marriage tax penalty luckily no longer affects most couples. However, it does still affect higher earners, so if this is you, it’s something you’ll want to be aware of when deciding on your filing status (H&R Block, 2021). 

Should You File Jointly or Separately?

In the vast majority of cases, the IRS incentivizes filing jointly. (Next time you’re mad at your partner for the extra $200 they spent on cute shoes or a football with a drop of Tom Brady’s sweat on it, definitely yell at them. But when you’re done, take a breath and remember the hundreds or thousands more you’re saving on taxes by being married to this doofus and filing taxes jointly. Filing separately will result in lesser savings more often than not. However, there are a few cases in which you actually should file separately in order to minimize your tax burden: 

-Does one of you have to pay for a lot of out-of-pocket medical expenses? If so, you might consider filing separately if you have a high combined AGI. That’s because you’re only able to deduct your out-of-pocket medical expenses if they amount to more than 7.5% of your AGI. Therefore, the threshold for meeting this requirement will be higher when filing jointly since your AGI is a combination of both of your income streams (Turbo Tax, 2021).

-Couples in the process of getting divorced might choose to file separately because filing jointly could complicate things with the IRS and plunge them into a sea of paperwork and bureaucracy post-divorce. If you’re getting divorced and you don’t like the idea of being on a first-name basis with Harry from the IRS, consider filing separately as soon as it becomes clear that a divorce is in the cards (Turbo Tax, 2021).

-Some couples choose to file separately simply because one of them is suspicious of or doesn’t agree with the other’s tax ethics and prefers to live a separate tax life (Turbo Tax, 2021). If you think your partner might be doing something shady tax-wise, it’s best not to involve yourself. 

-Did you know that if you file jointly, the IRS can apply your refund to your partner’s balance due? Not wanting to be liable for one’s partner’s tax burden is another common reason for filing separately (Turbo Tax, 2021). 

If you do decide to file separately, keep in mind that doing so disqualifies you from claiming many credits that cannot be applied unless filing jointly (H&R Block, 2021).

Prenups and Taxes

There are a few tax considerations you’ll need to take into account when getting married. Luckily, a prenup offers you a framework for managing and planning tax-related matters during (and after, if applicable) your marriage. 

You might know your spouse’s favorite ice cream flavor, but do you know about their debt to the IRS? We hope so, but you might not. If one or both of you owes money to the IRS,  it’s important to keep in mind that after marriage, you could become partially responsible for that debt when the tax collector comes knocking. However, in your prenup you have the option of deciding which assets are shared and which are separate. Assets you own separately as an individual can be protected from your partner’s IRS debt collection. On the flip side, if you owe money to the IRS, you can protect your partner from your debt in the same way (Hello Prenup, 2021). 

Maybe you don’t have many assets going into your marriage, but what will happen later when an investment finally pays off or one or both of you find yourselves in a fancy office complete with a treadmill desk and a cushy paycheck? You’ll be subject to a higher tax burden in that case, and you’ll need to figure out how you’re going to allocate tax responsibility between the two of you, particularly if filing jointly. You may even prefer to keep tax obligations separate even after you’re married. A well-rounded prenup allows you to stipulate in detail how you will manage certain possible future tax situations (Hello Prenup, 2021).

You can also decide and specify in your prenup whether you intend to file taxes jointly or separately (Hello Prenup, 2021). Taking the time to carefully consider your options ahead of time might save you from tense discussions later on when the tax deadline is approaching quickly and you’ve not talked about how you plan to file. If you don’t agree on what the right decision is, you’ll want to find this out and sort it out in advance when you have plenty of time to think and chat instead of in the moment. 

A prenup can also include stipulations for who will be in charge of managing and defending a tax audit as well as allocating responsibility for any possible future tax penalties (Hello Prenup, 2021). 

Keep in mind that tax laws change like the weather, so some of the tax stipulations in your prenup could be rendered invalid as a result. For this reason, it’s important to keep an eye on any tax regulations that might affect any of the arrangements laid out in your prenup. Luckily, you can always go back later and tweak and renegotiate your prenup with an eye towards changing regulations (Hello Prenup, 2021). 

Put simply, a prenup can help you determine both pre-existing tax liability and tax liability incurred during the marriage (Hello Prenup, 2021). 

For further details on prenups and taxes, check out our article A Lawyer, a Priest, and a Tax Guy Walk Into a Bar…

The process of drafting a prenup also functions as an absolutely fantastic financial planning boot camp. It sparks discussion around a wide range of financial issues to consider that you may not have thought about before. These discussions can save you from conflict that might occur later on when you find yourselves confronted with an unexpected financial issue or decision. Hello Prenup’s interactive software provides a framework that will help you to become aware of different financial realities to take into account as well as to open up communication about them. Check out how it works in 4 steps. If you’re new to this, you can learn more about what exactly a prenup is on our website. 

Bottom line: A prenup can prevent a whole host of problems from arising later on. Furthermore, the financial planning that a prenup sets into motion will contribute to a strong foundation for your marriage for years to come. 

All content provided on this blog is for informational purposes only. HelloPrenup, LLC (“HelloPrenup”) makes no representations as to the accuracy or completeness of any information on this site. HelloPrenup will not be liable for any errors or omissions in this information nor for the availability of this information. These terms and conditions of use are subject to change at any time and without notice. HelloPrenup provides a platform for contract related self-help. The information provided by HelloPrenup along with the content on our website related to legal matters (“Information”) is provided for your private use and does not constitute legal advice. We do not review any information you provide us for legal accuracy or sufficiency, draw legal conclusions, provide opinions about your selection of forms, or apply the law to the facts of your situation. If you need legal advice for a specific problem, you should consult with a licensed attorney. Neither HelloPrenup nor any information provided by Hello Prenup is a substitute for legal advice from a qualified attorney licensed to practice in an appropriate jurisdiction.

References

Berry-Johnson, J and Bailie, K. How Much is the Standard Deduction for 2021 and 2022? Retrieved from: https://www.forbes.com/advisor/taxes/standard-deduction-2021-2022/

Efile. 2022. IRS Standard Tax Deductions 2021, 2022. Retrieved from: https://www.efile.com/tax-deduction/federal-standard-deduction/

Forester, D. 2021. Filing Taxes for Your Small Business in 2021: Deductions and Credits. Retrieved from: https://www.score.org/blog/filing-taxes-your-small-business-2021-deductions-and-credits

Hello Prenup. 2021. A Lawyer, a Priest, and a Tax Guy Walk Into a Bar… Retrieved from: https://helloprenup.com/prenuptial-agreements/prenups-and-taxes/

H&R Block. 2021. What are the Disadvantages of the Married Filing Separately Filing Status? Retrieved from: https://www.hrblock.com/tax-center/irs/tax-responsibilities/marriage-tax-penalty/

Taylor, M. 2019. Is There a Financial Benefit to Getting Married? Retrieved from: https://www.policygenius.com/personal-finance/news/is-there-a-financial-benefit-to-getting-married/

Turbo Tax. 2021. Should You and Your Spouse File Taxes Jointly or Separately? Retrieved from: https://turbotax.intuit.com/tax-tips/marriage/should-you-and-your-spouse-file-taxes-jointly-or-separately/L7gyjnqyM

Turbo Tax. 2021. When Married Filing Separately Will Save You Taxes. Retrieved from: https://turbotax.intuit.com/tax-tips/marriage/when-married-filing-separately-will-save-you-taxes/L7FD32bvj

 

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