"A Beginner’s Guide to Taxes When You’re Married" by @lifehacker
Taxes are confusing enough as it is, but when you get married, the rules can be even more complicated. Here's some basic info that married couples, whether same or opposite sex, should know about taxes.
When you're used to filing taxes as a single person, you might not know where to start once you're married. Let's first look at how it works, federally.
Federal Taxes
Federally, you'll either file as "Married Filing Jointly" or "Married Filing Separately". If you have a marriage license, you'll file a federal tax return as a couple, whether you're in an opposite- or same-sex marriage. Since the Supreme Court struck down the Defense of Marriage Act, the IRS has taken a "State of Celebration" stance on how same-sex couples should handle their federal taxes. TaxFoundation.org explains this in detail, but it basically means that the IRS goes by its own guidelines and doesn't adopt your state's guidelines for filing taxes.
Here are some factors to keep in mind when you file taxes as a married couple.
Marriage Penalty vs. Marriage Bonus
When you decide to file jointly, you might be hit with a marriage penalty, or you might get a marriage bonus. It will depend on different factors, but mostly will depend on your income.
Today.com explains that many couples will get a "financial boost," because their overall taxes go down. A "marriage penalty" usually happens when partners have similar earnings, and combining those earnings bumps them up to a higher tax bracket.
Benefits of Filing Jointly
Legal site NOLO explains some of the advantages to filing jointly. For one, legally married couples are exempt from taxes on gifts shared with each other:
"Legally married couples are exempt from almost all federal taxes that are levied on transfers of property or money between them, whether made during life or at death. These rules now apply to all legally married same sex couples."
Of course, there are stipulations and exemptions, and you should read more about those here.
There are advantages when it comes to employment benefits, too. NOLO explains:
"When an employee, their heterosexual spouse, and their children receive health benefits through a job, the value of those benefits is exempt from tax by the federal government. This benefit now applies to spouses in legally recognized same sex marriages."
TurboTax points out some additional advantages:
- Jobless spouse can have an IRA
- Marriage can protect the estate
- A married couple can get greater charitable contribution deductions
Married Filing Separately
If you and your spouse are used to keeping your finances separate, you might prefer to file your taxes separately, too. TurboTax lists some other reasons you might want to file separately—one of them being the marriage penalty we mentioned earlier.
Whatever your reason, The IRS lists a handful of special rules that apply when you're "Married Filing Separately." These rules usually mean you'll pay more in taxes. Here's why:
- Your exemption amount for figuring the alternative minimum tax is half that allowed on a joint return.
- You cannot take the exclusion or credit for adoption expenses in most cases.
- Your capital loss deduction limit is $1,500 (instead of $3,000 on a joint return).
In most cases, it makes more sense to file jointly, but you can test both approaches before officially filing to see which one works best for you. Or, better yet, consider enlisting the help of a tax professional if this is new territory for you.
State Taxes
Obviously, if your state doesn't have an income tax, then you don't have to worry about this section. But generally, when you file state taxes, your filing status will be the same as your federal filing status. Your information simply carries over to your state return, the same way it does when you're single. There are some exceptions to this, and we'll get to those later.
Expenses and Community Property States
When you file taxes, you list all of your qualifying expenses that allow you to receive deductions. These expenses might be student loan payments, property taxes, etc.
If you're "Married Filing Separately," you'll have to figure out how to report and divvy up joint expenses on your return. Taxact.com explains that this will depend on whether or not you live in a community property state.
The community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska is an opt-in community property state.
If you don't live in one of these states, you usually just deduct the expenses you actually paid, individually. Taxact adds:
"If you pay expenses from a joint fund, you presumably each paid one-half of the expenses unless you show otherwise. You can only deduct expenses for which you were liable. For example, if you pay property tax on land owned only by your spouse, neither you nor your spouse can take deduct the property tax."
If you have a casualty loss on joint property, you each can deduct one-half of the loss.
But if you are filing in a community property state, generally, you each claim one-half of the expenses on your return when you file separately.
If You File a Different Status on State Vs. Federal
In some cases, even if you and your spouse filed a joint federal return, it might make sense to file separate state returns. Rapidtax explains, using one couple's situation as an example:
"The primary problem is that it's impossible to determine the residency of a joint state return when each spouse is living in a different place….The man's situation is pretty simple. He was a resident of NY for all of 2012. It's pretty clear that he has to file a NY resident return. This will tax him on all of his income for the entire year, no matter where it was earned. His wife's situation is more complex because halfway through 2012 she moved from OH to NY. This means that she needs to file an OH part-year resident return and then a NY part-year resident return."
In this situation, the couple has to decide which makes more sense: filing a joint state return, reporting her residence as part-year, or simple filing separately. Situations will vary depending on different factors—when she moved, for example. If you're in a complicated situation like this, and you're not sure which route to take, check with a tax preparer.
If Your State Doesn't Recognize Same-Sex Marriage
Many more states are starting to recognize same-sex marriage. In those states, same-sex couples can file their state return as a married couple, just as they would on their federal return, according to TurboTax. But if your state doesn't recognize your marriage, the rules will vary.
A few states that don't recognize same-sex marriage will still allow you to file jointly and use the joint income listed on your federal return. Other states require a different approach, according to the Tax Foundation:
- In some states, same-sex taxpayers have to allocate income to two single returns using a state-provided schedule.
- In some states, same-sex taxpayers have to complete pro forma federal single tax returns and use that information for the state returns… "These 'dummy' federal tax returns are not filed with federal authorities but used only for calculating state tax liability," The Tax Foundation explains.
- In Alabama, same-sex taxpayers apportion income according to a ratio.
Re-Working Your Tax Workarounds
Because of DOMA, some same-sex couples may have set up legal workarounds for their finances in the past. Today.com explains that these workarounds may have allowed couples to own property jointly or leave an inheritance. Now, they may have to rework these workarounds, depending on the benefits for filing jointly.
For example:
"Experts say same-sex couples should make sure their wills and inheritance plans are organized to make sure spouses are taking advantage of the favorable tax laws that now apply to them because they are recognized as married. The review should include things like 401(k) retirement plans, which usually require the investor to name a specific beneficiary."
A few other tax provisions to keep in mind when reworking your financial workarounds: retirement contributions, child tax credits, and the earned income credit.
Amending Old Returns
The IRS explains that same-sex spouses can also amend old returns:
"For tax year 2012, same-sex spouses who filed their tax return before Sept. 16, 2013, may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status. For tax years 2011 and earlier, same-sex spouses who filed their tax returns timely may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status provided the period of limitations for amending the return has not expired. A taxpayer generally may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later."
We're in a time of transition with legalization of same-sex marriage. And that means the tax laws can be really confusing for couples. This is meant as a basic guide, and, again, it's best to talk to a professional if this is all new for you. You can also check out the IRS' FAQ for same-sex marriages.
In general, taxes can seem confusing when you're married, because you're used to filing as a single person. But it's really pretty straightforward once you know the basic rules. Again, if your situation is a little more complicated, and you're not sure about it, a tax preparer can help you get started.
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