Getting Married

You've undoubtedly heard about the so-called marriage tax penalty, the quirk in the tax law that sometimes makes married couples pay more income tax than they would if they had remained single.

Here's a little secret: Many married couples actually get a marriage bonus, paying less income tax than if they stayed single. At issue is the graduated nature of the tax system, which applies higher tax rates to higher levels of income. When you pile one person's income on top of another's on a joint tax return, it can sometimes push some of that income into a higher tax bracket.

Congress has taken steps to reduce the impact of the marriage penalty. The ceilings for the top of the 10 percent and 15 percent brackets on joint returns are precisely twice as high as the ceilings on single returns (that was not always the case). As incomes rise into higher brackets, though, the tax ceilings on a joint return aren't quite double the ceilings on a single return. That can cause a marriage penalty, but it doesn't guarantee one.

The more unequal two spouses' incomes, the more likely that combining them on a joint return will pull some of the higher-earner's income into a lower bracket. That's when the marriage bonus occurs.

On the other hand, when the two spouses have more equal incomes, and they are both substantial, the odds of getting hit with the marriage penalty go up.

If you do face a marriage penalty, you can't get around it by continuing to file as a single person. That's because if you're legally married on December 31, you're considered married for the full year and you must therefore file as either married filing jointly or married filing separately.

Using the married filing separately status rarely works to lower a couple's tax bill. You can't, for example, game the system by having one spouse itemize deductions while the other claims the standard deduction. Both husband and wife must either itemize or use the standard deduction. You can't mix and match.

Once you're back from the honeymoon, you and your spouse need to check in with your bosses to adjust withholding from your paychecks. First, sit down with the instructions for Form W-4 or consult IRS Publication 919: How Do I Adjust My Tax Withholding? to determine how many withholding allowances you deserve.

Once you come up with the proper number, you can divide them however you choose, recognizing that each allowance is worth more (in terms of reduced withholding and more take-home pay) to the higher earner.

Unfortunately, many working couples have to worry more about under-withholding than over-withholding. The W-4 instructions have a special worksheet to take this into account by walking you through the process of eliminating allowances the other rules say you should claim. Don't think of this as a punishment. The goal is to match withholding with what you'll actually owe for the year—so you don't get either a big refund or a nasty tax surprise when you file.

Speaking of your jobs, the new Mr. and Mrs. Joint Venture could open up some new opportunities to save. Draw up a list of the tax-favored fringe benefits at each workplace. If you can be covered by your wife's medical plan, for example, maybe you can trade your coverage for another benefit.

If you changed your name when you got married, it's important to let the Social Security Administration know by filing a Form SS-5. If the name on your tax return does not match the name Social Security has for your Social Security number, any tax refund you have coming will be delayed until the discrepancy is resolved.

If you're up against the tax filing deadline and don't have time to change your name with Social Security, you can file a joint return with your husband using your maiden name (the one that matches your Social Security number), and then straighten things out in time for next year's filing season.

Once you're married, the amount of home-sale profit that can be tax-free potentially doubles from $250,000 to $500,000.  Here's how that works.

To qualify for the basic $250,000 tax-free home sale gain privilege, one spouse must have lived in and owned the home for at least two years during the five-year period ending on the sale date.

To qualify for the larger $500,000 tax-free gain privilege for married joint filing couples, both spouses must have lived in the home you sell for at least two years during the five-year period ending on the sale date, and at least one spouse must have owned the home for at least two years during that five-year period.

For example, say your new wife sold her house before the wedding so she could move in with you? What's the maximum exclusion that can be claimed on your joint return? Assuming your spouse meets the two-out-of-five-year tests for the house she sold, the $250,000 basic tax-free gain limit applies just as if she were still single. What if she instead sold her home right after the wedding? Still, just $250,000 of the profit on the sale of her home can be tax-free.

If both husband and wife sell their respective homes in the year of the marriage, and both meet the two-of-five-year tests, then each spouse can take advantage of the basic $250,000 tax-free gain privilege, for a combined total of us to $500,000 in tax-free gains.

Finally, say you and your spouse both live in the same home for at least two years during the five-year period ending on the sale date, and one or both of you owned that home for at least two years during the five-year period. In this case, you qualify for the larger $500,000 tax-free gain privilege available to married couples filing jointly.