Tax Changes After Marriage: What You Need to Know

The vast majority of taxes collected by the IRS each year comes from a particular group of adults -- married people. Interestingly, the portion of adults in America who are married has fallen from 69% in 1970 to only about 50% in recent years -- yet the portion of the total federal income tax haul that they're responsible for has not fallen proportionately. It dropped from 80% to 74% (as of 2014) -- perdata from the Pew Research Center.

If you're newly married or are planning to marry soon, it's good to get a handle on the tax rules and considerations that concern married folks. Even already-married people might benefit from that. Here's an overview for you.

Image source: Getty Images.

Here's a closer look at many things that married people need to consider when it comes to their federal tax returns. (Rules for state tax returns can vary widely.)

Your filing status after marriage

When each of us files our annual tax return, we need to choose a filing status for ourselves. There are five to choose from, and if you qualify for more than one, you can and should use the one that gives you the smallest tax bill. Here they are:

• Single: This is your status if you're not married, divorced, or legally separated.
• Head of household: This is your status if you are not married and pay more than half of the cost of maintaining a home for yourself and a qualifying dependent. (Not all dependents will qualify, but closely related ones such as children are most likely to qualify. Parents, in-laws, and nieces and nephews may also qualify.)
• Married filing jointly: This is one of the two filing statuses for married couples, resulting in a single return for both spouses, with incomes and deductions combined.
• Married filing separately: This is the other filing status married people can choose, where they each file a return of their own, keeping incomes and deductions separate.
• Qualifying widow or widower with dependent child(ren): If you maintain a home for at least one dependent child and your spouse dies, you can still file jointly or separately for the tax year in which your spouse died; for the two years following that, you may choose this qualifying widow(er) filing status as long as you're still maintaining a home for one or more dependent children. This status offers some relief, permitting you to use the same standard deduction as "married filing jointly" filers.

Note that you need to choose one of the two married statuses if you were married by the last day of the tax year. So for your 2018 tax return, even if you're single for 360 days of the year and get married in late December, in the eyes of the IRS, you'd be considered married for the entire tax year.

Here are the standard deductions allowed for each of the five statuses for 2018:

Data source: IRS.gov.

How to file taxes -- jointly or separately?

As a married person, should you file separately or jointly? Well, it all depends on the two people involved -- your incomes, your possible deductions and credits, and so on. Most couples find that filing jointly makes the most financial sense, but in some circumstances, filing separately will leave you with a smaller total tax bill. (Couples with one spouse who is a nonresident alien generally file separately, but read up on the topic first, as there are other possibilities.)

Married filing jointly means you qualify for an extra-large standard deduction, and that you'll enjoy higher income thresholds for various tax breaks (so you can take advantage of them despite having a higher income). Your exemptions also change when you get married, if you file jointly. On your tax return, you'd claim two exemptions instead of the one you claimed when filing singly.

Note that when you file jointly with your spouse, you're both taking joint responsibility for the information on the return and for the tax obligation. If there are any penalties or interest charges levied, you're both on the hook for them. (If one spouse has a messy tax past, the other spouse is generally not responsible for that.) The separate filing option is also smart if you're not comfortable with your spouse's financial dealings or behaviors.

Married filing separately will often make the most sense if one spouse has hefty deductible medical expenses. Those can only be deducted to the extent that they exceed 7.5% of adjusted gross income (AGI). For example, imagine that you have an AGI of $60,000; 7.5% of that is $4,500. If you have $6,000 of qualifying expenses, you could deduct the amount that exceeds $4,500, or $1,500. With a joint return, you're likely to have a higher AGI, so it's harder to exceed this threshold, and the deduction would likely be smaller or nonexistent. (The threshold has been 7.5% in recent years, but beginning with the 2019 tax year, it will return to its previous level of 10%.) Those with high medical expenses and low incomes are able to get the most out of this deduction.

Married filing separately means that:

• Any dependent child or children can only be claimed as a dependent by one of you, even if both of you work and support them.
• You will be ineligible for certain tax breaks, such as the adoption expense credit, the American Opportunity and Lifetime Learning education credits, the Child and Dependent Care Credit, the Earned Income Credit, the deduction for student loan interest, and the tuition and fees deduction.
• The ability that single people have to offset up to $3,000 of their income with capital losses is halved; you can only offset up to $1,500.
• You may be limited to a smaller IRA contribution than if you filed jointly. These rules are tricky, but they depend on whether either spouse participates in an employer-sponsored retirement plan such as a 401(k) -- if either of you do, then the ability to deduct IRA contributions becomes restricted according to your income, and you may not be able to deduct much or anything.
• Both spouses must either itemize deductions or take the standard deduction -- one can't itemize while the other takes the standard deduction.
• Filing separately will get complicated if you live in one of the states with community-property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. You'll need to follow your state's laws when calculating community income and separate income for your federal return. (Note that Guam and Puerto Rico are also community-property regions, while Alaska has an optional community property system.) Community-property rules have all income earned during a marriage to be equally owned, so if you file your taxes separately, you'll each claim half of your total income, even if one of you earns twice as much as the other. If you live in one of these regions, it can be worth reading up a little on your options in order to see what's your most tax-minimizing route.

The information above can help you think about which filing status you'll choose, but wait to decide until you prepare your return both ways, to see which will save you more money. This is where using tax-prep software (or a professional tax preparer) can help.

Image source: Getty Images.

Married people use different tax brackets 

Tax rates are occasionally changed by lawmakers, as they were in the 2018 Tax Cuts and Jobs Act (TCJA). Here's a closer look at the 2018 tables of tax brackets, below, showing what different tax rates apply to what income ranges for various filing statuses:

Data source: IRS.gov.

Don't misunderstand the concept of tax brackets, as many do: If you're in, say, the 22% tax bracket, it doesn't mean that all your income is taxed at 22%. Take a closer look at the table above: If you're married filing jointly and have a taxable income of $150,000, your first $19,050 will be taxed at just 10%, while your next $58,350 (that's $77,401 less $19,051) is taxed at 12%, and your final $72,600 ($150,000 less $77,400) is the amount that gets a 22% haircut. Those three tax hits are $1,905, $7,002, and $15,972 -- totaling $24,879. If you divide your total tax bill of $24,879 by your joint income of $150,000, you'll see that your effective tax rate is 17% -- not 22%.

This reflects a progressive tax system, where higher incomes are taxed at progressively higher rates. Remember, too, that the incomes above don't reflect your paycheck totals. They refer to your taxable income, which is what you're left with after you subtract various amounts. In a nutshell:

Gross Income - Adjustments = Adjusted Gross Income (AGI)

AGI - Deductions = Taxable Income 

Adjustments are items such as deductible contributions to a traditional IRA, bad debts, and student loan interest (up to $2,500). When it comes to deductions you'll either take the standard deduction or will itemize your deductions (for donations to qualifying charities, mortgage interest, qualifying medical expenses, etc.), if they exceed the standard deduction. Personal exemptions used to be subtracted here, but they have been eliminated beginning with tax year 2018.

Image source: Getty Images.

Same-sex spouses, civil unions, and domestic partners

Are you in a committed same-sex relationship, or a domestic partnership of the same- or different-sex variety? Well, know that in the eyes of the IRS, civil unions and domestic partnerships do not count as marriages and do not qualify you to file as spouses.

It's different if you did get married, though. In 2013, the Supreme Court struck down the Defense of Marriage Act (DOMA) and recognized same-sex marriages for federal tax purposes in the landmark case United States v. Windsor. That was followed, in 2015, by the more-sweeping Obergefell v. Hodges decision, which found that the Constitution guarantees same-sex couples the right to marry. Thus, married same-sex couples now live in a very different federal tax world and have fewer special rules to look up. They can prepare and file their federal tax returns just like other married couples do.

The famous "marriage penalty"

You may have heard of the "marriage penalty." It refers to what sometimes has happened to couples -- if they file a joint return and end up paying more in total taxes than if they'd filed separately. There have also been, conversely, "marriage bonuses," where the joint filers end up paying less than they would have separately. Bonuses generally happened when the spouses' incomes are very different. According to the Tax Foundation, marriage bonuses have recently been as high as 21% of a couple's joint income and penalties can be up to 12% of it.

Here's some good news, though: Various tax law changes have lessened the impact of the penalty in recent years, and the most recent tax-reform legislation has all but eliminated it. Below is a simplified example of how the penalty happens and how it has been shrunk, from my colleague Matt Frankel:

Let's say that two single individuals each earned a taxable income of $90,000 per year. Under the old [pre-tax-reform] 2018 tax brackets, both of these individuals would fall into the 25% bracket for singles. However, if they were to get married, their combined income of $180,000 would catapult them into the 28% bracket. Under the new brackets, they would fall into the 24% marginal tax bracket, regardless of whether they got married or not.

Thus, this is one issue most married folks won't have to worry about anymore -- unless they're extremely high earners.

Itemizing deductions may suddenly make sense

When preparing your tax return, whether you're doing so singly or jointly, you should tally the various deductions you're allowed to take and see how they compare to the standard deduction. If the standard deduction is higher, take it. If not, itemize your deductions.

Getting married means, if you file your taxes jointly, that you'll be combining not only your incomes but also your deductions. This can change the result of the calculations, making itemizing suddenly worthwhile. On the other hand, the latest tax reforms have significantly increased the standard deductions, so that may be the best option for more people.

Itemization is often the better option if you have made a lot of qualifying charitable contributions. For example, imagine a married couple filing jointly. Their standard deduction is $24,000. If they have $10,000 of charitable contributions and $8,000 of deductible medical expenses for a total of $18,000 in deductions, that's not worth itemizing, as it's less than the standard deduction. But if they also have $8,000 of mortgage interest, that totals $26,000, making itemizing the better choice. Married couples often buy a home, sometimes their first, so mortgage interest often enters their tax picture after marriage -- making itemization often worthwhile.

Couples can give bigger financial gifts without taxes

You may know that you're allowed to give gifts of money to other people without triggering taxes -- as long as you don't exceed a certain amount. For 2018, the annual gift tax exclusion amount is $15,000. So if you have, say, three children, you can give up to $15,000 to each of them each year -- for a total of $45,000. If you're married, though, the two of you can give up to $30,000 -- two times $15,000 -- to each one. For parents who are in the process of moving money from their accounts to those of their kids, perhaps as part of an estate plan designed to minimize taxes, this ability to give twice as much money can be quite welcome.

Meanwhile, the estate tax, which really applies to very few people due to its high threshold, has seen its exclusion doubled. It used to hit the portion of a single person's estate that exceeds about $5.6 million, but now it will only apply above about $11.2 million. For couples, it's even higher, at a new level of $22.4 million.

And, of course, being married means that each spouse can give unlimited sums of cash and other assets to the other, without triggering any gift taxes. Keep this in mind when planning your estate.

Image source: Getty Images.

The home sale exclusion is doubled

There's a powerful tax break available for anyone selling a home if they lived in it for at least two out of the five years preceding the sale. It lets a single person exclude up to $250,000 of the gain on the sale of a home from taxable income -- and for married people, that rises to $500,000 if you file jointly. So if you were single and sold your home, realizing a $350,000 gain, you'd only be taxed on $100,000. But a couple could exclude the entire $350,000, paying no taxes.

Of course, some rules apply, like the one mentioned above -- the person or couple claiming the exclusion needs to have lived in it as a primary residence for at least two of the five years preceding the sale. This tax break can save individuals tens of thousands of dollars, and couples can save twice as much.

Your post-wedding tax to-do list

So if you're getting married soon, or recently got married, what should you do? Well, keep the considerations above in mind as you move through your financial life.

Also, if either of you changed your name, be sure to notify the Social Security Administration. The SSA will then alert the IRS of the change. If you file your return with a new name that hasn't yet made its way into the IRS system, it could trigger problems and hold up the processing of your return. Meanwhile, alert all important parties of any address change, too; you can do so with the IRS by filing Form 8822.

If you're getting health insurance coverage through a federal or state marketplace, you should update your status there as well. If you've been receiving subsidies due to your income, that might change, due to your new income profile.

At your workplace, it's a good idea to review the W-4 form your employer has on file for you, and make sure that the number of allowances you've claimed is still correct. If not, update it. You can do so at any time. Less money will be withheld from your paycheck for taxes if you are designated as married and/or you increase your allowances.

The more you know about taxes, the less you might have to pay. That's welcome news for anyone, single or married.