If you have plans to get married or recently tied the knot, you may wonder what the impact is on your taxes. You’ve no doubt heard about the “marriage tax” – an unofficial term for various parts of the tax code that can mean you pay more as a married couple than you would as two unmarried taxpayers.
It’s not always bad news for married taxpayers, however. Here are five ways that being married can actually benefit you from a tax perspective:
You may pay a lower total tax if one of you earns significantly less
If one of you makes less money than the other, the tax brackets can work in your favor when you get married and file joint returns. Here’s why.
The tax code is written so that people who make more money pay a higher percentage of their income in tax. Taxpayers who make very little pay a smaller amount of federal income tax.
If a person in a high income tax bracket files jointly with someone in a much lower income tax bracket, their income together is taxed at a rate somewhere in between – generally resulting in a much lower total tax than they were paying as two single taxpayers.
Filing together may help you claim deductions and other tax benefits
Sometimes you can take deductions on a joint return that you may not qualify for otherwise. For example, say you have a business loss for the year and little or no other income.
You may not get any tax benefit from your loss this year. If your spouse earns a good salary or has other income, on a joint return your business loss helps offset that income.
We’d never recommend losing money as a tax strategy, but if you do have a business loss, it’s nice to get a tax benefit from it. Other deductions and credits may be limited by lower income levels when you file as a single person.
For example, you can generally deduct up to 50 percent of your adjusted gross income for charitable contributions to the most common charitable organizations. As a single person, if you make a major contribution in a year when you make less income, the total amount you can deduct is lower.
However, if you’re married and file a joint return, your income is combined with that of your spouse, so the total deductible amount for the same large charitable contribution will likely be higher, helping you save more on taxes.
On the other hand, your income as a single person may be too high for some tax benefits. Say you want to take the American Opportunity Credit for education expenses.
For 2015, the credit starts to phase out when your adjusted gross income reaches $80,000, and disappears by the time your income is $90,000. If you were married filing jointly, these phase-out numbers are $160,000 to $180,000.
If one of you earns less, you’re more likely to qualify for the credit.
Unlimited gift giving and rights of survivorship
If you’re not married and your significant other gives you more than $14,000 per year (in 2015), he or she must file a gift tax return. (There’s probably no gift tax due, however.)
After you marry, assuming you and your spouse are U.S. citizens, you can give each other as much as you like with no tax consequences.
Likewise, if your spouse is a U.S. citizen, you can leave as much money as you want to him or her when you die without generating estate tax. Special rules and limitation amounts apply to non-U.S. spouses.
Double the personal residence gain exclusion – even on a home that only one of you owns
If you own a home that has gone up in value, as a single person you may qualify to exclude up to $250,000 in gain from your income.
As a married person, you can exclude up to $500,000 from income. To qualify for this exclusion, you generally have to own and live in the house for two of the last five years or meet an exception such as a job transfer.
What if you owned the house by yourself before you got married or if the house was in one of your names? If you are married when you sell the house, only one of you needs to meet the ownership test for the exclusion.
You both must meet the residency period to exclude up to the full $500,000 of gain from your income, however.
You only have to file one return – not two
It should save you time and trouble to file only one tax return between the two of you. This is especially true if you combined some finances before you were married and then had to sort them back out again for tax purposes.
Now you won’t have to worry about details such as who paid the property taxes or whether a non-cash charitable contribution was from you or the other person.