By: N'dia Knight and Rosalind Sutch, CPA, MT
Shockingly, many of the eldest of those who fall into Generation Z are ready to start planning for marriage and building families. In today’s post we will discuss how marriage impacts tax filings status and tax liabilities for newlyweds.
Once you are married, you are no longer single. This seems like an obvious statement; however, you would be surprised how often we are asked if someone can file “single for one more year.” The correct answer is, “no,” unless you are married and divorced in the same year. The reason for this is, filing status is determined as of the last day of the year. Thus, if you are married on January 2nd or December 30th, you will be considered married for the entire year for tax purposes.
Generally newly married couples have two choices for your filing status: 1) Married Filing Jointly (MFJ); and 2) Married Filing Separately (MFS).
Often, spouses will choose the filing status that results in the lowest combined tax. This is almost always the MFJ status. This is due to the "averaging" effect of combining two incomes, which could bring some income out of a potentially higher tax bracket if the couples filed MFS. If one spouse has $75,000 of taxable income and the other has $15,000, filing jointly instead of separately for 2022 can save $2,192 in taxes. In addition, the items below are not available, reduced, or subject to additional limitations for individuals that file as MFS:
- Child and Dependent Care Credit;
- Earned Income Credit;
- Adoption Expense Credit;
- American Opportunity Tax Credit;
- Lifetime Learning Credit;
- Credit for the Elderly or the Disabled (unless you and your spouse lived apart for the entire year);
- Qualified Education Loan Interest Deduction
- IRA Contributions (if either you or your spouse was covered by an employer retirement plan);
- Exclusion for Adoption Assistance Payments; and
- Exclusion of interest income from series EE or Series I savings bonds you used for higher education expenses.
Unfortunately, sometimes couples may have a higher effective tax rate while filing MFJ. This is widely known as the “marriage penalty,” which exists when the combined incomes and the number of children involved lead to a married couple paying more income tax as married than they would pay as two separate singles.
Separate, But Not Equal
In addition to possibly forgoing the items above, if you decide to file MFS, you will not go back to using the single rates that applied before you were married. Instead, each spouse must use the MFS rates. These rates are based on brackets that are exactly half of the MFJ brackets, which almost always end up being less favorable than the "single" rates.
On rare occasions, the MFS status can yield tax savings for a couple. These situations usually occur when one spouse has significant amounts of medical expenses, and the other spouse has significant income. Since deductible medical expenses are reduced by a percentage of adjusted gross income (AGI), if the deductions are isolated on the separate return of a spouse, that spouse's lower (separate) AGI can cause a larger portion of the deductions to be allowed.
Filing separately can make sense economically even if it creates a higher tax burden when couples are managing student loan debt repayments because one or both spouses expect to have loan forgiveness under special programs for working in public service. Some complex calculations are required to determine if this is advantageous, so we highly recommend you consult a tax or financial planning advisor to assist you with these calculations.
Lastly, there can be other reasons to not file jointly, such as complying with pre-nuptial agreement provisions, privacy concerns (e.g., if one spouse has political ambitions that could require the release of their tax returns publicly) or concern about the joint and several liability that comes from filing MFJ.
Joint & Several Liability
While filing MFJ often results in paying less total tax, it also makes each spouse jointly and severally liable for the tax on combined income, including any additional assessed tax, interest, and most penalties. This means that the IRS can come after either spouse to collect the full amount. Although provisions in the law offer relief from joint and several liabilities, each provision has its limitations. Even if a joint return results in less tax, you may file a separate return if you want to be certain of being responsible only for your own tax.
Domestic Partners & Civil Unions
Domestic and civil union partners cannot file returns as married (MFJ or MFS). For federal tax purposes, you would be considered single. A domestic or civil union partner can file as head of household if they meet the requirements for that filing status. However, maintaining a home for the other partner, or for a child of the partner who is not the taxpayer's biological or adopted child, does not entitle a taxpayer to file as head of household. Your state tax filing status(es) may vary from your federal filing status in the case of domestic partnership or civil unions. Advisors from our Modern Family and LGBTQ Tax Consulting Practice can help you navigate these scenarios.
We encourage you and your spouse to consider every circumstance before deciding the best filing status for your family. If either of you has a tax advisor, speaking with them as soon as possible is always a good start—this is a Gen Z tip as well as a tip for any newly married couple! There are also tools such as this marriage tax calculator available to help you quantify the tax impact of various filing statuses.