Tax Issues When Planning Marriage
When planning to marry, don't forget the IRS! Weddings often spring a tax trap
known as the "marriage penalty." This penalty applies because many tax rules
discriminate against two-earner married couples.
|Standard deduction. For example, the standard deduction for
married taxpayers is less than the standard deduction for two single individuals. In the
28% tax bracket, a couple could pay $350 additional tax on the difference in standard
|Tax rates. If you're married, the combined income of you and
your spouse may push you into a higher tax bracket than either of you would be in as
singles. This feature in the tax law creates a "penalty" on marriage that gets
more severe as two-earner income rises.
To illustrate: The top tax rate applies to income above the same dollar amount for both marrieds and singles. Two individuals who are single could each have $288,350 of income without hitting the top rate, but two individuals who are married with each making $288,350 would have about half of their income taxed at the highest rate.
|Earned income credit. Wealthy taxpayers are not the only
ones who are affected by the marriage penalty. If your income is low enough, you can
qualify for the earned income credit. Married taxpayers must report their combined income,
but unmarried taxpayers with only a single income to report, find it easier to qualify for
|Social security benefits. A penalty also hits
marrieds receiving social security
benefits. If you're married, you must combine your incomes, pushing you over the
taxability threshold more quickly than singles. The law may subject a higher
percentage of your benefits to income tax, so the penalty for being married increases
|Other areas. Differences between singles and married couples
also exist in the rules governing capital losses, mortgage interest, and rental property
losses, to name only a few.
|Planning could help. One way to avoid the marriage penalty
is to remain single, but letting taxes determine your marital status is not recommended.
However, if you're planning a year-end wedding, you may want to consider delaying your marriage until next year. Not all married taxpayers pay more. Whether you will depends on many variables. We can help you determine whether the marriage penalty affects you, and what, if anything, you can do to minimize it.
If you're going through a divorce, taxes may
be the last thing on your mind. But divorce involves many potential tax traps and
pitfalls. Here are some things to watch out for.
|Alimony and child support. Alimony is taxable income to the
person who receives it and deductible by the person who pays it, as long as it meets
certain specific tax requirements. Child support is neither taxable nor deductible. A
divorce agreement should clearly spell out the difference between alimony and child
|Property settlement. When a divorcing couple agrees to a
property settlement, there are no immediate tax consequences. But when it comes time to
sell the property, one of the parties could be in for a nasty tax surprise. That's because
each spouse receives property with its original tax basis, and a low tax basis may trigger
a large capital gain down the road. A truly equitable property settlement should consider
the tax basis of assets, not just current market value.
|Children. After divorce, the parent who has custody of a
child for the greater part of a year generally has the right to claim that child as a
dependent. However, the custodial parent may transfer the dependency exemption to the
other parent by signing the appropriate IRS form. Why would you ever give away a
deduction? Because it may be worth more to your ex-spouse. In exchange for the dependency
deduction, you may be able to bargain for more alimony or a larger property settlement.
|Tax filing. As a married couple, you probably have been
filing a joint tax return. But during divorce proceedings, you may be better off filing
separately or, if you qualify, as head of household. Once the divorce is final, your
filing status will be either single or head of household. To qualify as head of household,
certain requirements for dependents must be met.
|© This material is copyrighted|
|Kenneth D. Eichner P.C.
Certified Public Accountants
Houston, TX 77042