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How to Say "I Do" to
Understanding Taxes
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Photo By
Sage
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By Heather Walsh, Vice President,
Wealth Management Advisor, Merrill Lynch
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| As you plan the details of your wedding day, you’ll
likely spend hours considering the flowers, the music and
the food. Making the big day memorable and unique is important,
but it is also crucial not to overlook planning for your financial
future together as husband and wife. Long-term decisions like
saving for a house and planning for retirement seem obvious,
but a more imminent decision facing you within your first
year of marriage is whether to file your tax return jointly
or separately. |
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| In the eyes
of the Internal Revenue Service (IRS), you are considered
married for the entire year in which you were married, even
if your wedding date was December 31. But just because you
are married doesn’t mean you have to file your tax return
jointly with your spouse, you can still file separately. The
following should be considered when choosing your filing status
since the choice can alter your return or payment considerably.
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In deciding whether to file jointly or separately,
if there is any doubt as to which method would produce the
most favorable results, you should calculate your tax liability
using both methods and compare the results.
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| There are many benefits to filing
jointly depending on your personal situation, including: |
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Potentially greater tax savings: The
filing of a joint return can result in a tax savings in
those instances where differences in the tax rate brackets
for joint and separate returns result in a higher tax for
married individuals filing separately. Also, for purposes
of the alternative minimum tax (AMT) it may also be beneficial
to file jointly since the higher AMT exemption and higher
phase-out can allow the couple to shelter a greater amount
of preference income from the AMT.
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Filing is simpler: You only have to complete
one tax return.
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It’s easier to save for the future:
You may be able to contribute to an individual retirement
account (IRA) on behalf of a non-working spouse when you
file jointly. In addition to filing jointly, there are a
few other requirements that must be met in order to take
advantage of this benefit.
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For traditional IRAs, the non-working spouse must
be under age 70½ .
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For Roth IRAs, the working spouse’s compensation
must be under $160,000 (contribution amounts are phased
out between $150,000 and $159,999).
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In addition, for the 2005 tax year, $4,000 is the
maximum individual contribution ($4,500 for a spouse
age 50 or over), and $8,000 is the maximum contribution
if both spouses contribute ($9,000 if both are age 50
or over).
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There are tax-saving education benefits:
When you file jointly you may qualify for a number of education
deductions or credits that you wouldn’t qualify for
if you filed separately. For example, you must file jointly
in order to take the deduction for interest on qualified
education loans (student loans). You also must file jointly
in order to benefit from education credits such as the Hope
credit and Lifetime Learning credit.
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In addition, when you file jointly you may qualify for
the earned income credit, the adoption expense credit and
the child and dependent care credit.
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In some cases you can lower your combined tax
bill by filing separately. Consider filing separately if:
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You have large expenses: If you (or your
spouse) have large expenses that must meet a minimum percentage
of adjusted gross income (AGI) before qualifying as deductible,
filing separately might be the best option for you. By filing
separately, the expense is measured against only one spouse’s
AGI, making it easier to meet the minimum percentage requirement
and allowing for more of the expense to qualify as a deduction.
Items that fall into this category include medical expenses,
casualty losses and miscellaneous itemized deductions.
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Your spouse owes certain money: If your
spouse owes unpaid child support or has defaulted on student
loans, filing separately will keep your refund from being
withheld by the IRS to repay your spouse’s obligations.
You do not want to be responsible for your spouse’s
tax liability: If you file separately, you are only responsible
for the return you file.
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You do not want to be responsible for your spouse’s
tax liability: If you file separately, you are
only responsible for the return you file.
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There are a few additional things that you should be aware
of as you prepare your taxes for the first time as a married
couple.
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If you changed your name, make sure to contact the
Social Security Administration to have your social security
number reflect your new name. If you neglect to do that
and submit a tax return with your new name, the IRS
computers won’t be able to match the name with
the number. A name-number mismatch could pose all sorts
of tax problems, from delayed returns to disallowed
deductions.
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If you bought your first home together, be sure to
claim the interest from your mortgage, as well as any
points you paid at closing. The downside is you must
itemize your deductions in order to take advantage of
this benefit, so you need to make sure your total deductions
(state taxes, mortgage interest, home equity loan interest,
property taxes charitable contributions, etc.) will
exceed the standard deduction.
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If you moved to a new city because your spouse took
a new job and you paid for the move yourself, you might
be able to deduct your moving expenses.
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Deciding how to file your taxes is just one of many financial
decisions that you and your spouse will make throughout
the course of your marriage. In fact, planning ahead for
tax season is a great way to begin communicating about your
individual financial goals and marrying them into a successful
future.
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As you get caught up in the planning and excitement leading
up to the big day, don’t shy away from dealing with
financial issues. If you start with a sound financial plan
at the outset of your partnership, you will add greatly
to your chances for both marital and financial success.
Choose a financial advisor that both of you trust and who
can help you lay the groundwork for your financial future
together so you will be able to achieve your long-term goals.
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About the Author: Heather Walsh
is a Vice President and
Wealth Management Advisor for Merrill Lynch in Burlington.
Heather assists clients in developing long-term financial
plans and helps them develop strategies to manage their
personal and business finances. She can be reached at hwalsh@pclient.ml.com.
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Neither Merrill Lynch nor its Financial Advisors provide
individual tax or legal advice. These are various tax considerations
affecting personal financial planning and should be reviewed
with a personal tax advisor and attorneys.
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