After marriage, married couples can choose to file a joint income tax return. They can also choose to continue to file separately, even though they are married, by declaring that they are “married, filing separately.”
Marriage bonus
Most married couples will find that they face a lower tax liability overall by filing jointly than they would if they were filing separately as unmarried singles. This is known as the marriage bonus.
Filing jointly is almost always advantageous when one spouse earns much more than the other, because the combined taxable income for a married couple is taxed at a lower rate than the higher-earning partner’s individual tax bracket. Whenever the difference is greater than the lower-earning partner’s individual tax liability, the couple gains a marriage bonus.
The greatest tax advantage to filing jointly is usually seen where one partner earns a lot while the other partner earns very little. As incomes come closer together, the tax advantage of marriage is reduced and may be lost altogether.
Marriage penalty
Some high-income married couples may find that they can pay less tax overall by filing separately, because their combined income pushes them into a higher tax bracket than they would be in individually. It happens most often when both spouses are earning approximately the same taxable income. This is known as the marriage penalty.
The marriage penalty does not currently apply to couples filing jointly who have a combined taxable income in the 10% and 15% tax brackets. As soon as combined income exceeds this threshold, the tax bracket for married couples filing jointly jumps to 28%. Most singles, filing separately for half that income, would still be in the 25% tax bracket.
At the time of writing, Congress has not yet reauthorized the legislation which would allow the full amount of this tax break for married couples to continue beyond 2010. However, it is likely that the tax break for married couples at the 10% and 15% tax brackets will be approved.
Deductions
The standard deduction for a married couple is twice that of a single person. If, together, you have more deductions than the standard deduction, always itemize. If you have less, use the standard deduction.
The maximum deduction allowed for real estate losses is identical for individual and joint returns. It does not double like the standard deduction. It also phases out for modified adjusted gross incomes between $100,000 and $150,000, whether that income is individual or combined. this will affect most married couples who own rental real estate and whose combined modified adjusted gross income exceeds $100,000.
The maximum deduction allowed for excess capital losses is also identical for individual and joint returns. It does not double like the standard deduction. This will affect most married couples whose excess capital losses exceed $3,000.
Withholdings at source
Newlyweds who change their marital status on their W-4s to “married, filing jointly” may find that each workplace deducts the married allowance before withholding taxes. In this case, the total amount of withheld income tax probably won’t be enough to cover the amount of taxes owed, even if the total income tax owed is lower. Instead of a refund, couples in this scenario wil find that they still owe tax money at the end of the year.
One option is to give W-4 exemptions to the partner with the greater income, while keeping the W-4 status of the other partner as Single. If in doubt, keep W-4 status for both partners as Single, with no deduction. that way, at least you won’t be hit with a nasty surprise, come April.
A useful IRS publication on tax withholding is Publication 919: How do I Adjust My Tax Withholding? Unless you live in a state with no income tax, also check the withholding rules which apply in your state.
Date of marriage
To marry or not to marry should never be a decision based on taxes. However, the date of marriage may affect your tax return. Your status on the last day of the fiscal year will decide your marital status for tax purposes.
Pay attention to upcoming changes in income tax deductions.If your joint taxable income after marriage will put you into a higher tax bracket, plan ahead to find and allocate deductions which will reduce your joint taxable income enough to bring it back down. If a valuable deduction is about to be phased out or otherwise changed, you may choose to time your marriage to take best advantage of the change.