Figuring out how to file first taxes as a couple

PERSONAL FINANCE

May 28, 2006|By EILEEN AMBROSE | EILEEN AMBROSE,SUN COLUMNIST

The wedding season is under way, and couples' minds are likely focused on invitations, dresses, tuxes and tiered cakes.

But sometime between the honeymoon and April 15, newlyweds will need to consider taxes. No longer single-filers, couples have the choice of submitting returns as married filing jointly or married filing separately.

That's the easy part.

Being married can throw you into a higher tax bracket or result in other changes on your federal return. Here are a few tax items to consider as you start on the journey of wedded bliss:

A change in status: You'll need to file a new W-4 form with your employer to change your filing status from single to married. The Internal Revenue Service also has a W-4 online calculator at www.irs.gov to figure out the amount of taxes you want withheld from your paycheck given a change of finances.

While you're at the human resources department, update beneficiaries on workplace benefits, such as a 401(k) or life insurance, said Maggie Doedtman, advice manager with H&R Block in Kansas City, Mo. Also, those who change their names need to alert the Social Security Administration. That way, "when they file a return, we won't reject it because the name doesn't match the Social Security number," said IRS spokesman Jim Dupree.

Marriage bonus/marriage penalty. This is not: having someone to greet you when you get home/losing control of the TV remote.

A marriage bonus occurs when a couple pay less tax together than when they were single. This benefit typically occurs when one spouse makes significantly more than another or when only one mate works, said Bob D. Scharin, a senior tax analyst with RIA, a provider of tax information in New York.

A marriage penalty is when a couple end up paying more tax than if they had remained single. It most likely hits higher-income spouses with similar earnings, Scharin said.

With so many women in the work force, couples stand a better chance of running up against the marriage penalty. Tax law changes in recent years helped lessen the penalty, although these adjustments disappear after 2010 like many other tax breaks.

One change raised the standard deduction for couples, so it's twice as much as that of a single. This year, the standard deduction is $10,300 for a couple, and $5,150 for singles.

(Single parents remarrying will see less benefit, Scharin said. The standard deduction for a head of household is $7,550. If two single parents marry, their standard deduction is still $10,300, not $15,100.)

In another tax law change, the income threshold for married couples eligible for the 10 percent and 15 percent tax brackets has been increased to twice that for singles. For instance, filers move out of the 15 percent tax bracket once taxable income exceeds $30,650 for singles, and $61,300 for married joint filers.

Generally, once couples get into higher tax brackets, the marriage penalty can crop up. For instance, two singles with taxable income of $70,000 each will be in the 25 percent bracket, Scharin said. But combined, their taxable income exceeds the $123,700 limit for the 25 percent bracket. "If they married, some of their taxable income would be in the 28 percent tax bracket," Scharin said.

Filing separately won't help, either, and may even exacerbate some of the tax quirks that work against couples.

For instance, a single filer may be eligible to deduct up to $2,500 of student loan interest on federal returns, Scharin said. But once married, the maximum the couple could deduct is $2,500, not $5,000. And married couples filing separately can't deduct the interest at all, Scharin said.

Individual retirement accounts. If one or both of you have been investing in an IRA, you may have to revisit your contributions, Doedtman said.

For instance, if you didn't have a retirement plan at work while single, you could contribute to a traditional IRA and deduct all your contributions no matter your income. But if your new spouse has a retirement plan, your deductions now are determined by household income, Doedtman said. If your combined adjusted gross income is under $150,000, you could still deduct your full contribution. But deductions begin phasing out between $150,000 and $160,000. If you file separate returns, you won't get any deduction if income is $10,000 or more.

Joined together. Most couples file joint returns. By doing so, each is liable for the tax bill or any penalties, even if the marriage doesn't last. "Even if a spouse has a business and kept things separate, by filing jointly you are liable," Doedtman said.

And what if you learn later that you unwittingly married a tax cheat and the IRS comes after you to pay the tax bill?

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