Taxes When You're Married vs. Single
When you get married, you have the option to file two individual tax returns as "married filing separately," or combine them into one joint return as a married couple. Congress moved to eliminate the so-called "marriage penalty" in 2001. The marriage penalty was the quirk in the tax code that resulted in married couples having a higher tax liability filing jointly than they would if they were two individuals filing as single taxpayers.
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Work Incentives
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If you are married, file jointly and one spouse stays at home, there may be less incentive for her to go back to work than there would be if you were single. This is because of the way marginal tax brackets work. A family's income is taxed in a series of increasing tax brackets, starting at 10 percent and working its way up to 35 percent, under current tax law. These tax brackets are expected to continue through 2012 under a compromise between President Obama and Congressional Republicans. If you are currently in the top tax bracket and your spouse goes back to work, she will be in the 35 percent tax bracket as well. Every dollar she earns is taxed at the top 35 percent rate, since it is added to your income. However, if you were single, she would have the benefit of the lower tax brackets.
Possible Loss of Tax Credits and Incentives
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Congress means-tests a number of valuable tax credits and incentives, such as the child tax credit and the retirement savers' credit. When two incomes are combined in a joint tax return, the combined incomes often disqualify a family from receiving the benefits of the credit. If one spouse has a low income, that spouse could potentially claim the credit if filing singly.
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Standard Deductions
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Congress eliminated the marriage penalty on standard deductions with its 2001 legislation. The standard deduction for a married couple is now twice the deduction for single individuals. However, in some cases, careful tax planning can allow one spouse in a high tax bracket to allocate itemized deductions to her return, while a spouse with low income can take the standard exemption. This type of planning works best when spouses live separately or when they have very different income levels. The way to take advantage of this is to file as Married Filing Separately.
Techniques
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Married couples should compute their taxes twice: once as married individuals filing separately and once as married filing jointly. Where possible, allocate tax deductions to the return with the higher tax bracket.
Status Definitions
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The IRS considers you to be married for the whole year if, on the final day of the tax year, you are married and living together. Alternatively, if you are living together in a common law marriage in a state that recognizes common law marriages or that is recognized in the state where your common law marriage began, the IRS also considers you married for the whole year. If you are married and living apart but not legally separated or if you are separated under an interlocutory divorce decree, the IRS still considers you married. You can choose to file a joint return or as married filing separately.
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References
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