In the U.S., married couples have the option to file “Married Filing Joint” as opposed to filing two separate tax returns. Because tax rates are increased at higher income levels, if one spouse is making little to no income and the other spouse has high earnings, filing jointly can significantly reduce ones tax burden. In addition, there are various tax credits that are available to married filing jointly taxpayers.
Depending on the taxable income, joint taxpayers falling in the tax bracket above 15% may either face a marriage penalty or get a marriage bonus. Being aware of these tax rules may help taxpayers getting married be prepared for the changes in their tax situation.
The following is a brief overview of the IRS’ marriage penalty and bonus. We hope this article will provide you with information useful to discuss with your tax professional, and to take the necessary steps to reduce the impact.
‘Marriage Penalty’ and ‘Marriage Bonus’
The terms “penalty” and “bonus” refers to the change in a couple’s total tax bill. This is a direct result of getting married and filing taxes jointly. The impact could vary based on the couple’s combined income, similarity in income, and the number of children the couple has.
Married coupled with the same level of taxable income are much more likely to incur a marriage penalty. A penalty can occur both in low income or high income situations. For those individuals with high incomes, as the income level increases, the high income tax brackets for joint filers are not as wide as the same level brackets for single tax filers. For low income taxpayers, combining the incomes can cause a loss of certain tax credits. These credits are phased-out when income levels rise. These include the earned income tax credit and child tax credits.
The marriage bonus occurs when two individuals who marry have a significant difference in their income level. When one spouse earns a high income and the other spouse earns significantly low to no income, the couple can take advantage of the lower tax brackets. Thereby, providing a lower tax bill.
Using Gifting Strategy To Pay For Wedding Expenses
In the U.S., parents and grandparents are allowed to gift $14,000 annually to their children. This amount is excluded from gift tax. Each parent can claim the $14,000 exclusion, i.e. a total of $56,000 for the wedding. This method often turns out to be a great way for parent’s to pay for the wedding while escaping gift taxes. The couple and their parents should be aware that the amount needs to be transferred/handed to the children as a gift. Wedding expenses should not be paid directly by the couples parents.
Sale of a Home
Once married, either of the spouses may decide to sell off their previous house. In some cases, both spouses may decide to sell off their respective houses and move into a new house. If a property sale is expected, it is important to be aware of the potential tax implications. If a house is owned as a principal residence for at least two of the five years preceding the sale, the first $250,000 of gain will not taxable. Couples may also choose to rent out the apartment or house rather than sell it. In such cases the couple should note that if they rent it for more than three or four years before proceeding with the house sale, they may not be able to claim the principal residence exclusion. In that case, it will not meet the two out of five year rule for a principal residence.
These are just few of the scenarios that could impact taxes in a new marriage. Couples may also wish to look into the impact on estate taxes, and other such consequences before getting married.
If a persons spouse is a non-resident or a dual-status taxpayer, we recommend to consult a tax professional. They can assist to determine how your tax situation could be affected.
Here are some important steps you can take to avoid additional stress at tax time:
- Report any name change to the Social Security Administration. This way, your name and Social Security number will match when you file your next tax return.
- If you have a new address, notify the IRS by sending Form 8822, Change of Address. It is also important to notify the U.S. Postal Service. This is to ensure all IRS correspondence and/or refunds will go to the correct address.
- Report any name and address changes to your employer(s). This will ensure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
- Check your withholding. If both you and your spouse work, your combined income may place you in a higher tax bracket.
- Newly married taxpayers may find that they now have enough deductions to itemize on their tax returns. Here is a helpful link to determine if you should itemize.
- Marital status on the December 31st determines if one is considered married for the tax year. Generally, the tax law allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Calculating the tax both ways can determine which filing status will result in the lowest tax, but usually filing jointly is more beneficial.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. We are a team of highly experienced tax professionals with extensive knowledge of U.S. and Canadian cross-border compliance, as well as U.S. and Canadian tax laws.
Furthermore, as a full service accounting firm, AG Tax is dedicated to assist you with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.