When I was little, I had very definite ideas about falling in love and getting married. My generation was the one that got up at the crack of dawn to watch Princess Diana walking down the aisle. I grew up believing in royal "happily ever after". I never stopped to contemplate what it would be like when all of that was over. You know, when reality stepped in.
Article written by our friend Kelly Phillips Erb, the Tax Girl
Unfortunately, I think that is true of my generation as a whole – and maybe even the one that followed. We've been fed a steady diet of poufy white dresses, fantastic layer cakes and dreamy proposals. All of those reality shows that focused on the big moments never bothered to show what life is like in the more real moments… the ones when you’re hunched over a desk trying to make sense of the bank balances and forms W-2.
Interestingly, worries and fights over finances are consistently cited as top reasons for divorce. Perhaps instead of focusing on the search for the perfect dress, we should encourage potential brides and grooms to search for the perfect accountant. And instead of worrying about putting our stamp on the perfect invitation, we should think about what it means to sign a tax return (or a mortgage or a car loan or other financial documents).
I've thought about that a lot today. You see, it’s my anniversary. Thirteen years ago today, I giggled through my vows in a little church in rural Pennsylvania. I married the blue-eyed boy from law school that I remember passing notes about in torts class. As different as we were – he, the Yankee Catholic who had lived and worked abroad in Germany and me, the Southern Baptist girl who spent most of her life in the same town – we shared the same values (with some important exceptions, like the value of country music). And while marriage doesn't have to be about making the same kinds of choices all of the time, you do need to be on the same page when it comes to certain things – and chief among them: finances. You see, even if you never care about how your spouse makes and spends his or her money, the Internal Revenue Service does. And when you put your signature on a joint tax return, the IRS will hold you to it – even if your spouse doesn’t
So, on a day that I will spend thinking a lot about marriage, I thought it would be appropriate to post ten things you need to know about getting married and taxes:
- Your marital status is determined as of the last day of the tax year (for individual taxpayers, this is inevitably the last day of the calendar year). It doesn't matter if you get married on December 31 – you’re married for the whole tax year so far as the IRS is concerned. Similarly, if you get divorced in July, you’re no longer married for the tax year. The one exception is for widows and widowers: the IRS still allows you to file as married (this is typically favorable for most taxpayers).
- Same sex couples who are married under state law are considered married for federal purposes. This includes not only income taxes but also gift and estate taxes. Registered domestic partnerships, civil unions, or similar formal relationships recognized under state law are not recognized for federal purposes.
- The so-called marriage penalty used to be attributable to the fact that the standard deduction for married couples was less than the deduction of two single taxpayers. That changed under the Economic Growth and Tax Relief Reconciliation Act of 2001. For 2013, the standard deduction for individual taxpayers is $6,100 and the standard deduction for married taxpayers is exactly twice that amount: $12,200.
- Also double? The capital gains tax exclusion that applies to selling your home. If you owned your home for at least two out of the past five years and it served as your primary residence for two of the past five years, you can exclude up to $500,000 from income subject to capital gains when you sell your home. Single taxpayers may only exclude up to $250,000. Here’s a quick example: let’s assume you bought your home for $100,000 (assuming no capital improvements or other adjustments to basis) and you are selling it for $600,000. If you are single, you can exclude $250,000 of the $500,000, so that you pay capital gains tax on the remaining $250,000. In the same example, a married couple would exclude $500,000 – and pay no tax. For purposes of the exclusion, only one spouse has to own the house for two of the past five years but both have to live in the house for at least two years (though you may count time that you were living together in sin, as Mom would say).
- You don’t inherit your spouse’s tax liability when you get married. If your spouse has outstanding tax liabilities before you tie the knot, those don’t become yours. Ditto for child support and student loan defaults. That doesn't mean that it won’t be a headache: filing jointly may still subject you to having your refund seized. You’ll have to notify the IRS that you want your refund split; this is referred to as an “Injured Spouse” allocation.
- You don’t have to file jointly when you’re married but you may not file as Single. If you want to file a separate return, the correct marital status is Married Filing Separate. If you elect to file as Married Filing Separate, both spouses must make the same election. Similarly, if you choose to itemize your deductions, both spouses must itemize; if you opt for the standard deduction, both spouses must claim the standard deduction.
- Your spouse is never your dependent. The correct term is “personal exemption” – and if you are filing a joint tax return, you may claim one exemption for yourself and one for your spouse.
- Once you get married, your parents cannot claim you as a dependent if you file a joint return with your spouse (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid). It doesn't matter if mom and dad are still paying the bills for you and/or your spouse or if they otherwise support you. Additionally, if you are filing a joint return and your spouse can be claimed as a dependent by someone else, you and your spouse cannot claim any dependents on your joint return.
- If you aren't working, you can still benefit from an individual retirement account (IRA). One of the often overlooked perks of filing jointly is that you and your spouse can each make tax deductible IRA contributions even if only one of you is earning money. For 2013, the maximum you can contribute to all of your traditional and Roth IRAs – including for a spousal IRA – to qualify for the deduction is the smaller of $5,500 ($6,500 if you’re age 50 or older), or your combined taxable compensation for the year.
- Your signature on that return means something. You might cheat on your husband or your wife and get away with lying about it but you don’t want to cheat on the IRS. When you sign that return, you are acknowledging to the IRS that you know what’s in the return and that you agree with it. Specifically, you swear under penalty of perjury “that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.” Unlike an argument at your house, the IRS doesn't care who said what and when. Unless you meet very narrow criteria (usually related to fraud or abuse) to qualify for Innocent Spouse relief, your signature on a joint return binds you to the consequences of that return – that includes civil and criminal penalties.
It’s a lot to contemplate. But getting right is important… Worrying about money and taxes can take a toll on a relationship. Throw in job stress, in-laws, owning a home, and a few kids – it’s quite a lot to sort out. Don’t put off talking about money and finances. Hire a good accountant. And be prepared. Years from now, you’ll be glad you did.
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