How Marriage Influences Your Taxes

This month, Anchin Private Client Tax Leader Mela Garber discussed tax and marriage with Yahoo! Finance.

The segment provided insight into a variety of considerations.

“The Center” sat down with Mela to help dive into the details.

Q: What are some of the benefits that a couple may find in filing joint tax returns?

A: Typically, when I run projections for clients who are deciding whether to file jointly or separately, the joint return projection offers greater tax savings. One factor that usually contributes to this is eligibility for tax credits that are not allowable when filing separately (such as education tax credits, child and dependent care tax credits, and adoption credits). Also, by combining their income, couples may find themselves eligible for both a lower tax bracket and a higher charitable deduction. In addition, combining income may allow a bigger qualified business income deduction.

Q: So are there any instances in which a couple might find it better to file separately?

A: Absolutely. One example would be if one spouse has lower income and substantial medical expenses. Medical expense deductions are allowed if they exceed a certain percentage of the adjusted gross income.  By filing separately, the threshold will be lower.

Q: Is there anything that people tend to forget when considering whether to file separately or jointly?

A: By default, when filing jointly, each spouse assumes liability for 100% of the tax on the joint return. Sometimes people overlook the ramifications of this, or do not know the entire picture when agreeing to it. They need to have important conversations in advance and be transparent with each other. For example, if one spouse has unpaid liabilities such as student loans or child support, the couples’ tax refund may be automatically applied to those unpaid liabilities. I have also seen couples underestimate the importance of paying attention to what may seem like minor administrative details. For instance, if there is any name change occurring in the marriage, the couple should know that failing to properly notify the social security administration can prevent a couple from e-filing and lead to delays with their refund.

Q: Is there any way around assuming each other’s liabilities, or does the couple have to file separately and lose out on the benefits you mentioned earlier?

A: The couple can submit an Injured Spouse Form along with their return in order to prevent this.

Q: When and how should a couple decide how to approach their tax return filing status?

A: The most important concept is that planning should be done in advance of the tax deadline.  Couples should have an open discussion about their assets and how they plan to handle their finances. Will they have joint bank accounts, separate accounts, or both? Will they combine investment assets? Are there any cryptocurrency assets? Will they have their tax liabilities allocated based on whose asset generated taxable income or will the spouse with more funds pay for both? The answers to these types of questions could help determine the best strategy.

Q: As we know, not every marriage ends happily ever after. What happens when there is a divorce? What complexities can couples expect and are there any common missteps you are seeing?

A: The first tax return post-divorce will have a great deal of complexity. One reason for this is that pre-divorce, assets may have been held in joint accounts. Therefore the income is comingled. It can seem very daunting, but working with an accountant to analyze the sources of income to determine the proper amount that should be included on each spouse’s return will ensure that neither party pays tax on their ex-spouse’s income. Another thing to note is that the IRS generally applies the prior year’s tax overpayment to the first person listed on a return. Advisors will need to be proactive to address this issue and ensure proper allocation of the overpayment.

To watch Mela’s discussion with yahoo! finance, click here.

For more information or to discuss tax planning strategies as they relate to marriage, contact your Anchin Relationship Partner or Mela Garber, Tax Leader of Anchin Private Client and the firm’s Matrimonial Services Group, at 212.840.3456 or [email protected].