With Valentine's Day approaching, thoughts of love and romantic marriage proposals are in the air for many couples. And most Americans are fully aware that getting married will have a profound impact on their lives in a large number of ways. However, they might not always consider that it typically changes a person's tax liabilities significantly. For this reason, it's smart for newlyweds and those who will soon tie the knot to make sure they are fully aware of the tax-related implications and to plan out a wise course of action with respect to their tax filings for the year.
So how does marriage affect taxes? Here are the most significant ways:
Changing Names and Filing Statuses
One thing that consumers absolutely have to do if they're changing their names after their marriage is let the Social Security Administration know about the changes. Failure to do so can lead to huge tax filing problems down the road. The newly married couple will also have to notify their employers about the changes to their filing statuses. Also, it's important to keep in mind that their marriage status as of December 31 is the status they should use to file for the entire year.
Filing Jointly or Separately
There's another aspect of marriage affecting tax status for couples to consider. If they plan to file jointly, the couple's combined incomes could push them into a new tax bracket. For this reason, they will have to look carefully at both what bracket they were in before they got married and what bracket they would be in after. In some cases, but certainly not all of them, it might be wise for couples to decide that they will continue to file separately as a means of keeping their liabilities as limited as possible.
Under the new tax law, homeowners with mortgages that originated on or before December 15, 2017, can still take the Mortgage Interest Deduction on loans up to the previous limit of $1 million. However, for those with newer mortgages, this deduction will only be available for loans up to $750,000. Both these limits apply to the combined amount of loans (for example, a first mortgage plus a qualifying home equity loan) used to buy, build, or substantially improve a main home and second residence.
Thanks to a 2015 lawsuit in California, unmarried couples can now deduct up to twice as much of their home mortgage interest costs because each individual of the couple can deduct up to $1 million in mortgage interest on existing loans (up to $750,000 on new loans). But if they're married, combined they can only deduct the interest on $1 million total ($750,000 total on new loans). Even if this doesn't change whether a couple decides to get married, it's a good idea for them to talk with a tax consultant before tying the knot to ensure they know the tax ramifications beforehand.
Tax Debt and Credit Status
Couples should remember that, when they get married, one person's debt and credit score can affect the other person. If one person of the couple owes money to the IRS, for example, it may be a good idea not to open joint checking or savings accounts in case the IRS imposes a levy or seizes assets. Although usually a partner is not responsible for a husband's or wife's debt incurred before marriage, the ability of the couple to get a loan or a mortgage together may be affected if one has bad credit.
Working with a tax professional is wise not only during filing season itself, but well in advance of the run-up to the April 15 deadline. This can help all taxpayers find the best plans to reduce their ongoing liabilities, maximize their deductions, and make plans so they can deal with any issues that might arise as quickly and easily as possible.
For more helpful tax information, contact Liberty Tax® directly at 1-877-at-Liberty, or schedule an appointment for or visit a conveniently located Liberty Tax® office near you. For real-time updates, follow Liberty Tax® on Facebook and Twitter.