Summer is the most popular time of the year to get married…now what?
As newlyweds settle into their married life together, tax planning is likely low on their list of priorities. And perhaps rightly so.
But marriage will almost certainly lead to changes in your tax situation and preparing early could be important if you want to avoid surprises later.
First, let’s set some expectations.
“There’s no magical new allure that gives you a lot of new benefits,” says Danielle Moncure, a CPA based in Detroit, Mich. who runs the First Gen Finance blog. “But there is some planning that you need to prepare for.”
The preparation may even start before the marriage.
“I got married in October but knowing that was the plan, I changed my withholdings at work earlier in the year,” says Moncure.
That’s because, from a tax standpoint, if you were married on or before Dec. 31, it’s as if you were married for the entire year. The same goes for having a child and some other major life events.
Here are a few of the significant tax-related changes you could experience. Some don’t necessarily require your immediate attention, although you might want to keep them in the back of your mind.
However, there are a few action items that you may want to tackle sooner than later.
Once you’re married, you’ll have to choose between the “married filing jointly” and “married filing separately” tax statuses on your next tax return.
“Generally speaking, married filing separately isn’t the best option for most people,” says Moncure. You won’t be eligible for some tax credits or deductions if you choose to file separately and filing jointly can be easier in terms of the paperwork.
Moncure says there may be exceptions when one spouse earns a lot more money than the other. Or, if one spouse has had some tax complications in the past and doesn’t want to potentially involve the other.
If you’re unsure which status to choose when filing your next return, you may be able to work with an accountant who will take all your (and your spouse’s) information and do a side-by-side comparison to see which status is best.
The new tax bill did away with personal exemptions but increased the standard deduction. Now, married couples who file a joint return will have a $24,000 standard deduction for their 2018 tax return.
The higher standard deduction may mean you won’t itemize your deductions, so things like medical expenses or charitable contributions won’t help your tax situation. But overall, it could lead to paying less in taxes.
When you’re single, you may be able to exclude up to $250,000 in income from the sale of your home. That tax-free limit can double to $500,000 once you’re married.
To receive the higher exclusion as a married couple, both you and your spouse must have lived in the home and used it as your main residence for at least two out of the previous five years. There are some other qualification requirements as well, such as needing to own the home for at least two years before the sale.
Knowing that your tax situation will likely change, there are a few things you can do to help you and your spouse prepare for next year’s return.
A new tax situation is one of many financial changes that you could face, and you may want to set aside some time to go over the rest of your finances as well. For example, Moncure says you might be able to save money if you’re both on the same health insurance plan rather than paying for individual plans separately.
Newlyweds also often decide to change how they manage their money once they’re married. There’s no “correct” method, but some put all their income and savings into joint accounts, others keep their finances completely separate, and some keep separate accounts but also open new bank accounts for shared goals or household expenses.
Did you get married this summer or attend a beautiful wedding? We’d love to see your pics! Follow Varo’s Instagram and tag us @varomoney.
Louis DeNicola is a freelance personal finance writer and credit enthusiast. You can find him on Twitter @is_lou.