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How to Say "I Do" to Understanding Taxes

By Heather Walsh, Vice President, Wealth Management Advisor, Merrill Lynch

As you plan the details of your wedding day, you'll likely spend hours considering the flowers, the music and the food. Making the big day memorable and unique is important, but it is also crucial not to overlook planning for your financial future together as husband and wife. Long-term decisions like saving for a house and planning for retirement seem obvious, but a more imminent decision facing you within your first year of marriage is whether to file your tax return jointly or separately.

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In the eyes of the Internal Revenue Service (IRS), you are considered married for the entire year in which you were married, even if your wedding date was December 31. But just because you are married doesn't mean you have to file your tax return jointly with your spouse, you can still file separately. The following should be considered when choosing your filing status since the choice can alter your return or payment considerably.

In deciding whether to file jointly or separately, if there is any doubt as to which method would produce the most favorable results, you should calculate your tax liability using both methods and compare the results.

Filing Jointly
There are many benefits to filing jointly depending on your personal situation, including:

Potentially greater tax savings: The filing of a joint return can result in a tax savings in those instances where differences in the tax rate brackets for joint and separate returns result in a higher tax for married individuals filing separately. Also, for purposes of the alternative minimum tax (AMT) it may also be beneficial to file jointly since the higher AMT exemption and higher phase-out can allow the couple to shelter a greater amount of preference income from the AMT.

Filing is simpler: You only have to complete one tax return.

Itís easier to save for the future: You may be able to contribute to an individual retirement account (IRA) on behalf of a non-working spouse when you file jointly. In addition to filing jointly, there are a few other requirements that must be met in order to take advantage of this benefit.

  • For traditional IRAs, the non-working spouse must be under age 70½.
  • For Roth IRAs, the working spouse’s compensation must be under $160,000 (contribution amounts are phased out between $150,000 and $159,999).
  • In addition, for the 2005 tax year, $4,000 is the maximum individual contribution ($4,500 for a spouse age 50 or over), and $8,000 is the maximum contribution if both spouses contribute ($9,000 if both are age 50 or over).

There are tax-saving education benefits: When you file jointly you may qualify for a number of education deductions or credits that you wouldnít qualify for if you filed separately. For example, you must file jointly in order to take the deduction for interest on qualified education loans (student loans). You also must file jointly in order to benefit from education credits such as the Hope credit and Lifetime Learning credit.

In addition, when you file jointly you may qualify for the earned income credit, the adoption expense credit and the child and dependent care credit.

Filing Separately
However, in some cases you can lower your combined tax bill by filing separately. Consider filing separately if:

You have large expenses: If you (or your spouse) have large expenses that must meet a minimum percentage of adjusted gross income (AGI) before qualifying as deductible, filing separately might be the best option for you. By filing separately, the expense is measured against only one spouseís AGI, making it easier to meet the minimum percentage requirement and allowing for more of the expense to qualify as a deduction. Items that fall into this category include medical expenses, casualty losses and miscellaneous itemized deductions.

Your spouse owes certain money: If your spouse owes unpaid child support or has defaulted on student loans, filing separately will keep your refund from being withheld by the IRS to repay your spouseís obligations.

You do not want to be responsible for your spouseís tax liability: If you file separately, you are only responsible for the return you file.

Final tips
There are a few additional things that you should be aware of as you prepare your taxes for the first time as a married couple.

  • If you changed your name, make sure to contact the Social Security Administration to have your social security number reflect your new name. If you neglect to do that and submit a tax return with your new name, the IRS computers won't be able to match the name with the number. A name-number mismatch could pose all sorts of tax problems, from delayed returns to disallowed deductions.
  • If you bought your first home together, be sure to claim the interest from your mortgage, as well as any points you paid at closing. The downside is you must itemize your deductions in order to take advantage of this benefit, so you need to make sure your total deductions (state taxes, mortgage interest, home equity loan interest, property taxes charitable contributions, etc.) will exceed the standard deduction.
  • If you moved to a new city because your spouse took a new job and you paid for the move yourself, you might be able to deduct your moving expenses.

Deciding how to file your taxes is just one of many financial decisions that you and your spouse will make throughout the course of your marriage. In fact, planning ahead for tax season is a great way to begin communicating about your individual financial goals and marrying them into a successful future.

As you get caught up in the planning and excitement leading up to the big day, donít shy away from dealing with financial issues. If you start with a sound financial plan at the outset of your partnership, you will add greatly to your chances for both marital and financial success. Choose a financial advisor that both of you trust and who can help you lay the groundwork for your financial future together so you will be able to achieve your long-term goals.

Heather Walsh is a Vice President and Wealth Management Advisor for Merrill Lynch in Burlington. Heather assists clients in developing long-term financial plans and helps them develop strategies to manage their personal and business finances. She can be reached at hwalsh@pclient.ml.com.

Neither Merrill Lynch nor its Financial Advisors provide individual tax or legal advice. These are various tax considerations affecting personal financial planning and should be reviewed with a personal tax advisor and attorneys.

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