5 tax tips for the newly engaged couple and their CPA
I’m getting married in June, and for me, wedding planning has been relatively simple and drama-free. I’ve buttoned up the budget, signed every contract, booked travel and have a final headcount for the caterer. There’s just one thing that’s still unsettling my mind.
What’s going to happen to my taxes?
It seems like such a straightforward question, but newlyweds often find themselves on the wrong side of a tax bill. Couples may think it’s silly — or even awkward — to think about taxes just after getting engaged, but a financial head start could do wonders for a marriage (money issues are often cited as a cause of divorce).
As a tax practitioner, you are in the unique position to help guide clients like me through this financial milestone. Knowing what to look for and how to spot potential red flags can be key to keeping them on track. For a little insight, I reached out to Tax Practice & Ethics team members Susan Allen, CPA, CGMA, CITP, and Henry Grzes, CPA.
Here are five questions they say you should ask when determining how to assist your clients through “I do.”
- How will the new marriage affect your clients’ withholdings?
Your client likely knows that getting married will influence their filing status, but they may not realize how it could influence their tax burden. Many factors go into determining the rate at which the couple will be taxed, including earnings, investments and other forms of income. A couple’s combined tax liability may end up being less than what it would have been individually, but that’s not always the case. When a couple with similar — and generally high — incomes marry, they may be at risk of a marriage penalty, which can be as high as 12 percent. Tax reform means that this penalty is less common.
It’s possible that a couple will experience a marriage bonus, particularly if they have disparate incomes. The higher income earner will see a reduction in taxes as some of their income will be taxed at a lower tax bracket when filing jointly. Either way, it’s key your clients determine how they will adjust their withholding to eliminate tax season surprises.
- Is the new couple creating a blended family?
A married couple must determine if it is in their best interest to file jointly or separately especially if they are creating a blended family. Under the new tax reform legislation, a child tax credit is worth up to $2,000 per qualifying child, with a refundable portion of $1,400. There is also a credit for dependents other than qualifying children under the new law, such as a parent or dependent over the age of 17. It’s important for the couple to remember that this credit begins to phase out at $200,000 for single and $400,000 for joint filers. Run the numbers for your clients to help them determine how they should file.
For couples who have joint or shared custody, this question can be particularly difficult to answer. By statute, a parent must have custody of the child for more than 50 percent of the year to qualify for a tax credit. Also, be sure you’ve verified whether the ex-spouse plans to claim the child as a dependent or not. Help your client have an honest conversation with their ex so both parties are on the same page to avoid potentially expensive miscommunications.
- Is your client changing his or her name or address?
Your clients don’t have to report their name change directly to the IRS, but they should notify the Social Security Administration (SSA) before filing their next tax return. If a child’s name changes due to marriage, your client should take a similar step in notifying the SSA. But if the child does not yet have a Social Security number, they will need to apply for an Adoption Taxpayer Identification Number to use with their taxes.
Should your client change addresses due to the marriage, you should advise they fill out an IRS Form 8822. This will ensure they don’t miss any IRS refunds, notices or other communications.
- Does your client have any special considerations you should keep in mind?
CPAs should review each client’s situation for special considerations. Couples with investments, property or who stand to claim a significant inheritance should be advised of the unique tax implications of their union. Likewise, issues from previous marriages such as alimony or child support payments must be reviewed. If the parent owes back child support payments and files a joint tax return with their new spouse, the entire refund may be used to pay the debt.
Clients who expect to qualify for a passive loss may get a shock when they are no longer able to qualify. Taxpayers can take up to a $25,000 passive loss (or $12,500 if married filing separately) from rental real estate and other investments, but phase out starts at $100,000 and is completely lost at $150,000 for both individual and married filers
Also note, same-sex marriage is treated the same as traditional marriage for federal tax purposes. Civil-unions and domestic partnerships are not, but state laws may require these couples to file jointly. Be sure to review state guidance.
- Are there any red flags your client needs to be aware of now?
A new marriage always has a few wrinkles to iron out, but sometimes a major financial red flag requires special treatment from a CPA.
Getting married could become financially tricky if one spouse owes back taxes. If your clients live in a community property state, both spouses’ incomes could be vulnerable even if the debt was procured before the marriage. Regardless of the state, if the couple plans to file a joint return, the spouse who feels they should not be held legally responsible for the debt may file Form 8379 with the return (or by itself) to request their portion of the refund. If the debt is due to one spouse omitting income or claiming false deductions or credits, Form 8857 may relieve the tax burden for the “innocent” spouse. The couple should keep in mind that both spouses’ financial contributions to the household will be taken into consideration when the IRS is determining available income for payment plan negotiations.
Counsel your clients on considerations outside of tax planning, such as the creation of wills, healthcare proxies, etc., that will protect your client’s assets. Visit 360 Degrees of Financial Literacy for helpful resources to share with your clients regarding these and other financial planning opportunities.
“Will you marry me?” is often the most crucial question a person asks — or answers — in their lives. But these four words also kick off a lifetime of financial conversations, adjustments and sometime-hardships for the couple. Suddenly, two people with likely two different incomes and tax liabilities are planning to combine into one. Or maybe, they’re not planning at all.
And that’s where you come in!
Allison Carter, Communications Manager — Tax, Association of International Certified Professional Accountants