By Paul N. Gada, CCH Financial Planning Toolkit Staff Writer
If you were to believe the candy and greeting card industries, February is the month to celebrate love. It seems appropriate, therefore, that this month we consider how love and marriage and taxes go together.
If you're married, you and your spouse must decide whether to file jointly or separately. This may seem trivial, but this is an important issue for several reasons.
Your filing status is the first item you need to complete on your tax return, after your name, address, and Social Security number. This is appropriate, because your filing status is the starting point for determining whether you need to file a tax return at all, and, if you must file a return, the tax rates that will apply to your income.
While actually claiming your filing status on your tax return couldn't be simpler, knowing which status to claim is not always so easy. The primary factor in determining your status is whether you are married or not. If you are married, you and your spouse must decide whether to file jointly or separately. In some cases, recently widowed persons can be treated as married, and some married people who are not living with their spouses can be treated as single.
The rule for determining marital status is a simple one. If you are married on the last day of the tax year (December 31, for most people), you are considered to be married for the whole year. Conversely, if you are divorced during the year and don't remarry before December 31, you will be considered unmarried for the entire year.
What about common-law marriages? Generally speaking, if your state recognizes such marriages and you meet all the state law requirements, the IRS will recognize your marriage as well. Same-sex marriages, however, are not currently recognized for income tax purposes.
Why care about your filing status? In the vast majority of cases, filing jointly will result in a lower total family tax bill. The tax rates for joint filers have the effect of "leveling out" the income, exemptions, and deductions of each spouse, so that each spouse is essentially treated as having half of the total net income. For slightly more than half of married couples, this results in a "marriage bonus," because the couple pays less in tax than they would if they each made the same income and were single. This is usually the case where one spouse's earnings are much higher than the other's.
You should also be aware that in order to strongly encourage married couples to file jointly, Congress has provided that for people who are treated as "married," certain tax benefits are available only if a joint return is filed. When you consider the effects of not being able to claim any of these benefits, it's usually clear that filing separately would result in a larger tax bill.
For couples where each spouse makes roughly the same income, however, there is often a "marriage penalty" in which the second wage earner's income pushes the couple into a higher tax bracket than either spouse would face if they were single. Some of the sting from the marriage penalty, though, has been relieved by tax law changes in the last few years. This situation can also sometimes, but unfortunately not often, be helped if the couple files separately rather than jointly. To be absolutely certain whether joint or separate returns are better, you should compute your tax liability both ways and compare the results.
Now go out and file those returns. First, though, stop by and get your sweetie something to show you care or else you may be filing a single tax return next year.
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Added to the news on February 14, 2006.
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