Are you in a hurry to get married before year end ?
Boy I sure was. I was dating an incredibly beautiful woman. I don’t mean she was just pretty, I mean gorgeous. More importantly, she was a devout Christian and way smarter than me. She was talented too: a CPA, an opera singer and a karate champion. However she had one glaring weakness – she was easily fooled -she believed everything I told her. So I wanted to close the deal before she came to her senses. And I did just in time.
Now that the holiday seasons are upon us, it seems like an increasing number of people want to get married soon. I am frequently asked about the tax consequences of doing so. There are several and today we will discuss some of them :
- Tax Liabilities
If you come into a marriage owing taxes, or if your soon to be spouse owes taxes, the fear is the IRS will pursue both parties for the taxes of one. This is true only if no planning is done. However, if proper planning is done you can be reasonably sure that the IRS will be prevented from doing so. Therefore, if you intend to marry a person who owes taxes to the IRS, do not be afraid. This is a solvable problem with proper planning.
- Marriage Penalty and Bonus
The income tax rates for a married couple are much higher than those of two those single persons. Combining their income onto a joint return may place them into a higher tax bracket. This is called the marriage penalty.
Likewise, when two people have substantially different incomes so that one is taxed at a very high rate and the other at a very low rate, combining their income onto a joint return may place them into a lower tax bracket. This is called the marriage bonus.
This creates a planning opportunity. If one spouse has substantial income and the other spouse does not, marrying before the end of the year and combining their income on a joint return could result in a lesser income tax liability- a bonus.
Conversely, if they have approximately the same amount of taxable income they might prefer to delay the marriage until next year and avoid the marriage penalty.
The point is, if you are in a hurry to get married, these are factors that you might consider in timing that marriage.
- Itemized Deductions
We are able to deduct certain expenses on our tax return such as home mortgage interest, charitable deductions and the like. These are called itemized deductions. Unfortunately, as our income increases our itemized deductions are phased out. So when we get married our combined income may start the faze out sooner . So when you meet with your accountant you want to make sure that you discuss not only the tax rates on combined income but also the phased out of itemized deductions.
- Year End Income Planning
Some people may be able to time some of their income. This is particularly true of year-end bonuses or commission for sales persons. They may accelerate income into this earlier year or defer it into a later year.
If you are about to get married and one of you has substantial income and the other one does not, it may make sense to get married this year , combined their income and file a joint return now. Likewise if both parties have substantial equal income, it may pay to accelerate income into this year and delay the marriage until next year. All of this should be discussed with your accountant who can do a draft tax return to see how the numbers come out.
- Related Sales
If you are about to get married, you might consider selling an interest in property to the other beforehand. That may allow you to recognize a loss before you are married. But once you get married, losses between related parties are typically disallowed. Consider this for example when one party owns an asset such as real estate.
So timing your marriage is a balancing act. On the one hand you want to make sure you close the deal while she’s foolish enough to say yes . However you may want to delay it long enough to take advantage of the marriage bonus or avoid the marriage penalty as the case may be.
Confidentially, if I were you I’d close the deal. It’s hard to land a good woman like I did.