Tax Pitfalls for Married Couples
If you exchanged traditional marriage vows when you tied the knot with your partner, you promised to stay together “for richer or poorer.” Unfortunately, some couples start married life with a significant tax liability because they make various mistakes when filing their tax return as a couple. To ensure you end up on the “richer” side of the equation, review these newlywed tax pitfalls and learn how you and your spouse can avoid them.
Consider Your Paycheck Withholdings
Whether starting a new job or making a change at your current job, your employer will ask you to fill out various forms. One of them is Form W-4, which indirectly tells your employer how much tax to withhold from your paycheck. Unfortunately, the form is typically inaccurate and impractical, especially for married couples.
Form W-4 attempts to be a one sized fits all tax withholding calculator. The problem, however, is that many people receive bonuses and/or inconsistent pay. For example, if you receive $4,000 in one paycheck, your employer will calculate withholding based on $4,000 annualized without consideration of anything else going on in your life, including prior and future pay. Each paycheck is looked at in a vacuum. In addition, the maximum withholding rate is 22%, which is problematic for those that receive a significant amount of pay via their bonus and are actually in one of the higher tax brackets. Single tax filers typically under-withhold because of this. For married couples that both earn income, this problem is magnified for two reasons: 1) it duplicates the under-withholding problem and; 2) each spouses’ employer will withhold even less than they would for a single filer because by default, Form W-4 assumes that the other spouse does not work.
How you fill out Form W-4 could make all the difference in whether you get a refund from the IRS or end up owing the government money. Proactively adjusting your W-4 to account for your partner’s income is the best way to ensure you don’t owe the IRS money when you file your tax return.
Get a Legal Name Change as Soon as Possible
To file taxes, your legal name must match the name linked with your Social Security number. If you or your spouse plan to change your last name, you must visit your local Social Security Administration office to legally finalize the name change. You’ll want to do this as soon as possible to ensure the transition goes through before your tax return is filed.
Decide Whether to File Jointly vs. Separately
Once you’re legally married, you have several critical decisions to make regarding your finances – one of which is whether to file taxes jointly or separately. If you have debt or old tax lien issues that could impact your return, you need to review your options in detail, since filing jointly will make your spouse equally responsible for what you owe. Consult with a professional tax advisor to see whether filing separately or jointly makes more sense for your situation.
If you and your partner don’t have to worry about outstanding debt or back taxes, you can take advantage of some of the benefits of filing jointly, including a slower climb through the tax brackets and higher thresholds for tax deductions and credits.
Do You Need Experienced Tax Advice?
Taxes can be complicated, especially for newlyweds who have never filed taxes together before. If you’re uncertain about your circumstances and want to ensure your tax return is correct, our tax professionals are always happy to help you take advantage of post-marriage tax credits and deductions you could otherwise be missing.
Raines & Fischer’s qualified team of certified public accountants will work directly with you to answer all your questions quickly and knowledgeably. Please contact us to request our services and start your married life on a sound financial foundation.