Newlyweds, this is how your taxes may differ this year
The case for joint taxes
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If the thought of accounting ledgers, 1040 tax forms, and bank statements makes you shudder, you may be tempted to curl into a ball until tax season is over. And if you got hitched last year and are thinking of filing jointly for the first time, it could add a layer of complexity and set of questions for you to mull over.
For first-time joint filers, there’s a host of tax breaks that don’t apply to individuals. Not to worry. Using online tax software could easily walk you through the new process. Plus, we’ve got a few tips for couples who are filing jointly, so they can best prepare and do their taxes with ease and confidence.
What tax credits and deductions are exclusive to joint filers?
Yes, you’re dealing with double the paperwork arriving in your mailbox. But filing jointly certainly comes with its share of tax breaks.
A bigger standard deduction
First things first: If you're filing as an individual and are under 65, the standard deduction for 2020 is $12,400. If you're married and filing jointly, the standard deduction is bumped up to $24,800.
Deductible business losses
Does your spouse own a business that's losing money and leaving them with unused deductions? As their spouse, you could swoop in and apply them to your joint income, says Josh Zimmelman, managing partner of the New York-based Westwood Tax & Consulting.
Greater deduction for charitable contributions
Married couples filing jointly can take a greater deduction for charitable contributions. That's because the limits based on income are higher for married couples.
Note that due to the CARES Act, if you're taking an itemized deduction for 2020, you can deduct up to 100% of your adjusted gross income (AGI). Yup, you read that correctly. The limits on charitable contributions made in 2020 have been lifted for the time being.
And if you're taking a standardized deduction, in 2020, you can deduct up to $300 for charitable contributions. This applies to whether you're filing as an individual taxpayer or a filing jointly. But for your 2021 taxes, if you file jointly, you can swoop in on a $600 deductible instead of $300 for individual taxpayers.
Make retirement contributions, even if one spouse is unemployed
If you're single and are unemployed, you typically wouldn't be able to contribute to an IRA. But if you're married and have a joint IRA, you both can squirrel money away into the retirement plan, even if one of you is currently jobless.
"Eligible couples filing jointly can also contribute to two separate IRAs—one for each of them—and the income at which their IRA benefits start to phase out is higher for joint filers than single filers," Zimmelman says. Your IRA contributions lower your AGI, and that equates to tax savings for you.
You could fall into a lower tax bracket
Although not technically a credit or deduction, couples with drastically different salaries might benefit from filing jointly, explains Zimmelman. A partner with a lower income might pull their higher-earning spouse into a lower tax bracket. In turn, that means a lower tax rate.
When does it make sense to file separately?
A common misconception is that because you're married, you need to file jointly. The truth is that you have a choice. Here's when it might not make financial sense to file jointly, and you might fare better filing individually.
Filing jointly would push you into a higher tax bracket
If that's the case, it might be more advantageous to file separately, Zimmelman says. And should it be more beneficial for one spouse to itemize and the other to take the standard deduction, filing separately might be the better route for you.
One of you has out-of-pocket medical expenses
The IRS only allows taxpayers to deduct medical expenses that are greater than 7.5% of their adjusted gross income. Says Zimmelman: "If you have a lot of medical expenses, but your spouse has a high AGI, you'll be able to claim more if you file without them."
So you're not on the hook for the other's debt
While there are some tax perks that come with filing a joint return, it also means that your finances are, legally speaking, linked. In turn, you're both liable for each other's debts, penalties, or other issues—think defaulting on student loans, owing taxes, owing back child support—that could complicate financial matters, points out Zimmelman.
"If only one spouse has debts or other liabilities, they may want to file separately so they aren't both responsible for those debts," he says. "For example, if your spouse owes back taxes that could cost you your refund if you file jointly.”
However, there are some resources the IRS has in place to protect one spouse from the other's tax woes, explains Tai Stewart, an enrolled agent and founder of Saidia Financial. Let's say your spouse has past debt. In that case, the Injured Spouse Allocation (IRS Form 8379) can protect the portion of the tax refund that belongs to you, the "innocent" spouse who doesn't carry that past debt, from being seized by the IRS.
Neither of you have children or dependents
If there aren't any children or dependents involved, you might want to file separately, Stewart points out. "If each spouse gets a combined higher refund filing individually than they would if they filed jointly, they should consider filing separately to get that tax break," she says. "The IRS does allow you to file using whichever way would give the best advantage, so long as all rules are followed."
Ready to get started on filing jointly? Consider taking these steps
Here are some tips to make your first time filing jointly as smooth as possible.
Update your withholding
Once you begin filing jointly, you're allowed a higher standard deduction and additional exemption, Zimmelman says. "That means you should consider updating your W-4 to deduct fewer taxes from your paycheck."
Sit down to file your taxes together
It’s not uncommon that partners have different approaches to money. While one spouse might be more financially savvy and the designated household CFO, ideally filing your taxes jointly should be, well, a joint effort. "Both spouses should be fully aware of their tax situation and tax liability outcome," Stewart says. And of course, take the time to open up and talk about money with your partner—even when it's not tax season.
Get a jump start
By filing your taxes early, you could save yourself time, money, and hassle. "No matter what day in the year you are married, the IRS sees you as married for that entire year," Stewart says. "So it's best to start planning tax strategy early on in the marriage."
Know how a new last name might impact your tax return
If you adopted a new surname, make sure that the name on your tax return matches the one on file with the Social Security Administration, recommends Zimmelman.
Otherwise, it could cause delays in processing your returns. "If you've changed your name due to getting married (or divorced), you'll need to ... apply for a new Social Security card before you file your tax return," Zimmelman says. "The same applies to your dependents’ name changes."
To minimize headaches down the line, update your last name with not only the SSA, but the DMV, your bank, credit card issuers, any other financial accounts, insurance providers, and with accounts linked to your memberships and subscriptions.
Beware of identity thieves
Interestingly enough, the process of changing your name could boost your risk of identity theft. "Sharing your documents with all those people can increase the risk that the wrong person will see it and use it against you," Zimmelman says. "You can take steps to protect yourself, such as doing as much of the work in person." Of course, you'll want to be mindful of any COVID restrictions and safety.
You can also request an identity protection PIN (IP PIN) from the IRS. You might have to jump through some identity verification hoops, but it could help you from falling victim to theft.
Your first go round of filing your taxes jointly can be confusing and overwhelming. But by doing your homework and getting a jump start, it could put you on a stronger footing for a smoother tax season.