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Your Marriage And The IRS

  Sanjiv Gupta CPA  Published 
Your Marriage And The IRS

Whoever said that the marital status does not impact tax rates needs to do a rethinking. Here are the details of how staying married effects the tax process in a big way. It is the duty of the taxpayer to know the rules fully and pay tax the smart way.

Filing tax jointly or separately

This is an area that needs some analysis by both partners. Filing tax either jointly or separately has its own advantages and disadvantages. It is prudent to weigh both the options and choose the one that is most suitable for the partners. Most of the couples choose the option of filing tax jointly as it saves them lots of hassles. It requires filling up of one single form, and the problem of attaching every deduction, income, tax benefits to each of the partners individually, can be eliminated completely.

Filing two separate returns might result in a higher tax payment sometimes and the government benefits for child care, higher education concessions, etc cannot be availed if the bills are separate. It is a lot cheaper to file one single return for both the partners as it makes them eligible for all the potential benefits that they might be entitled to.

The major disadvantage of filing a joint tax return is that one partner is liable for any wrongdoing of the other partner. If one of the partners makes an underpayment or is levied any penalty for any wrongdoing either deliberately or negligently than other partner is equally liable for the crime. If the wrongdoing partner escapes or avoids investigation, the other partner has a high chance of being harassed by the judicial authorities and can be made to cough up a high fine at times.

In some worse cases, the innocent partner is harassed even after a legal divorce. Hence, a couple should opt for joint filing only if they are mutually confident about one another’s integrity. Separate tax filing, if done, may result in a slightly higher bill; however, it is worth to choose this option than to experience harassment for the wrongdoings of the other partner.

Marriage bonus or marriage penalty?

In cases of couples who earn fairly equal and handsome incomes, their combined incomes might fall at a higher tax bracket, and the couple may have to pay a slightly higher tax rate than they would have paid individually. However, couples who have a huge difference in incomes can get the marriage bonus due to reduced tax rates on the lower income.

Selling an appreciated home after getting married

One need not pay any tax up to $250,000 that is gained from selling a property for profit. If both the partners own homes and both sell at a profit, $500,000 can be the limit of tax-free income. However, after marriage or after moving into the same house, if the couples sell their old home, they not only get the $250,000 gain but after some time, also get $500,000 gain as part of the sale of the spouse’s house.