3-minute article

Tax tips for married couples

Whether your married clients have been together for decades or are just home from their honeymoon, it's important for them to understand the tax laws and how they affect married people. The Tax Cuts and Jobs Act of 2017 (TCJA) significantly changed the brackets for taxable income, specifically for couples filing jointly. But the biggest red flag for couples is that they may be penalized for filing joint taxes. This is sometimes referred to as the "marriage penalty." Encourage clients to talk to a tax professional who can explain how combining incomes can affect their tax situation.

Avoiding the "marriage penalty"
One unintended feature of the United States' income tax system is that the combined tax liability of a married couple may be higher than their combined tax burden if they had remained single. The TCJA offers little relief to married joint-filers if their salaries are not similar.

  • Unequal salaries: If partners earn salaries that put them in different tax brackets, TCJA can possibly bump the lower earner up into a higher tax bracket. This is an old issue, and TCJA doesn't change it.
  • Equal salaries: Generally, if both partners fall into the same tax bracket, they won't find themselves in a higher bracket if they file jointly. (One exception: earners in the top income bracket, which starts at $518,400 per year, may face a penalty if they file jointly.)

For example, the TCJA 24 percent federal tax bracket tops out at $85,525 for individuals and exactly doubles at $171,050 for married couples filing jointly. That means if each partner in the couple earns $85,000, they will each pay 22 percent when they file jointly. But, if one partner suddenly gets a raise or a bonus and earns $90,000, together they will be over the $171,050 and will both end up paying 24 percent, which is the next bracket, even though one person is still in the 22 percent bracket.

There are clear benefits and drawbacks of filing as a married couple, as a head of household, or as an individual. And when children and mortgage payments come into play, the details can get more complicated.

What else to consider under the 2017 laws
There are other areas of the law worth discussing, too. Specifically:

  • Standard deductions: Under the TCJA, standard deductions doubled. For those filing individually, a standard $12,400 can be deducted, and married couples filing jointly can deduct $24,800. Individuals who are filing as "head of household" can deduct $18,650. There are rules about who can be a head of household: they need to pay more than half of household costs, not live with their spouse for at least the last six months and have a qualifying dependent.
  • Child tax credits: These have increased from $1,000 per child to $2,000 per child under the 2017 laws. And families who earn more money can now take advantage of the credits. Previously the ceiling was parents who were filing individually or jointly up to $75,000 and $110,000; now families filing individually or jointly up to $200,000 and $400,000 can take advantage of the credit.
  • Additional dependents: While dependents who are older than age 17 won't qualify for the child tax credit, there is an updated qualifying dependent credit of $500.
  • 529 education savings plans: The annual gift tax deduction per individual is $15,000 in 2020, so couples can write off more of their children's future higher education costs, while letting those savings grow in a qualified tuition program, such as a 529 plan. One of the biggest changes with the TCJA is that 529 plans can now also be used to pay for tuition for K‑12 private schools.
  • Buying a home: Mortgage interest is still deductible, but moving expenses are no longer deductible. Individuals and couples filing jointly who aren't using the standard deductions can itemize up to $10,000 in property taxes. If a couple is filing separately, they can only together claim $10,000, so each would be able to claim up to $5,000.
  • Alimony: Married couples who are considering divorce should know that under the TCJA, alimony for any divorces completed after December 31, 2018, will no longer need to be reported as income.

Two things you can do today

  1. Review the changes to the tax law posted by the IRS.
  2. Make a list of your clients whose finances may be disrupted by changes to the tax law. Reach out to them to discuss their overall financial picture. 

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