If you plan to get married this year, don’t forget about the tax implications that come along with tying the knot. For instance, are you aware of the “marriage tax”? It’s an unofficial term for various parts of the tax code that mean you may pay more as a married couple than you would as two individuals.
But, while that may seem less than ideal. 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.
The tax code is written so that people who make more money pay a higher percentage of their income in tax. On the flip side, taxpayers who make less 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 the middle. Generally this results in a lower total tax than they paid as two single taxpayers.
Filing together can get you more deductions and other tax benefits.
For many people, getting married and filing a joint allows for more deductions.
As an example, let’s say you have a business loss for the year and little or no other income. As a single tax filer, the tax benefits from your loss are slim to none. However, if you were married and your spouse earned a good income, your business loss helps offset that income on a joint return.
While we never recommend losing money as a tax strategy, it’s nice to get a tax benefit if you do endure a business loss.
Additionally, when you file as a single person, other deductions and credits are limited by lower income levels.
Typically you can deduct up to 50 percent of your adjusted gross income for charitable contributions. As a single person, if you make a major contribution during a year where you make less income, the total deductible amount is lower.
However, if you file a joint return, your income is combined with that of your spouse. Therefore the total deductible amount for the same charitable contribution is likely higher. That helps save more on taxes.
On the other hand, your income as a single person can also be too high for some tax benefits. Many individuals often run into this problem when they try to take the American Opportunity Credit for education expenses.
For tax year 2017, the credit starts to phase out when your adjusted gross income reaches $80,000 and disappears when your income is $90,000 or above. But, if you are married filing jointly, these phase-out numbers increase to $160,000 and $180,000.
Filing jointly means unlimited gift giving and rights of survivor-ship.
If you’re not married and your significant other gives you more than $14,000 in a year (in 2017), he or she must file a gift tax return.
After you marry, however, you can give each other as much as you like with no tax consequences. (This is only true if you’re both U.S. citizens.)
Likewise, when you pass away, you can leave as much money as you want to your spouse without generating estate tax. Special rules and limitation amounts apply to non-U.S. spouses.
Getting married lets you double the personal residence gain exclusion.
If you own a home that has gone up in value and file single, you can only qualify to exclude up to $250,000 in gain from your income.
Filing jointly allows you to exclude up to $500,000. To qualify for this exclusion, you typically must own and live in the house for two of the last five years or meet an exception – such as a job transfer.
In the instance that you owned the house by yourself before you got married and sold it after tying the knot, only one of you needs to meet the ownership test. The same rule applies if you purchased the house while married, but only one of your names was on the deed. However, you can’t exclude the full 500,000 in this case.
In order to exclude the total amount, you both must meet the residency period.
You only have to file one return – not two.
Filing only one tax return between the two of you can save major. This is especially true if you combined a few finances before you wed and always had to sort them out for tax purposes.
Now you won’t have to worry about details like who paid the property taxes or if a non-cash charitable contribution was from you or the other person.