What You Need to Know When Filing Taxes as a Couple
Getting married can bring about many administrative changes—maybe you’re finally moving in together at a new address or you’re changing your name—and it can have considerable implications on how you file your taxes. In fact, the U.S. tax code provides a number of benefits to married couples that can be taken advantage of during tax season.
Along with your federal taxes, keep in mind that you will also have to account for state taxes. Income subject to state tax includes wages, dividends, interest, business net profits, net income from rents and royalties, and estate or trust income. State tax in Pennsylvania reflects approximately 10.2% of your income, the 15th highest rate in the country. If you’re a married couple trying to optimize your tax return, here are some things you should keep in mind when preparing to file your taxes this year.
Should You File Together or Separately?
On the surface, it may not seem like there’s much of a difference between filing your taxes individually or as a couple. Under the 2018 Tax Cuts and Jobs Act, individuals have a standard deduction of $6,350 and married couples filing jointly have $12,700—or $6,350 each. What may guide your decision with regards to filing, however, is income. If spouses have substantially different salaries, filing taxes together could put the higher earner into a lower tax bracket, reducing overall taxes. For those with similar salaries, there is risk of a marriage penalty, which is when the couple’s combined income pushes them into a higher bracket. Congress has taken steps to mitigate this, but it might still be reason enough to consider filing separately. As you approach Tax Day (April 15) each year, be sure to calculate which option makes the most sense for you.
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What Credits Should You Keep in Mind?
Once you’ve decided to co-file your taxes, you should look out for credits that help you make the most out of your tax return.
Spousal Individual Retirement Account (IRA)
An individual retirement account (IRA) is a tax-deductible retirement savings account that you can add money to on a yearly basis. What many don’t know is that you can also contribute funds to a spousal IRA if your partner does not qualify for their own due to unemployment or low income. Filing your taxes jointly would allow the unemployed partner to open a spousal IRA with a contribution limit of up to $6,000 annually. Like with traditional IRAs, this amount goes up to $7,000 for those aged 50 and above. By maxing out how much you put into your IRA, you can earn a tax credit for up to 50 percent of your contributions, depending on your gross income.
Earned Income Tax Credit (EITC)
Couples can also claim an earned income tax credit (EITC), which increases based on the size of their family. Married couples that do not have children are eligible for an earned income tax credit, or EITC, if they collectively make less than $20,950. On the other end of the spectrum, couples with three or more children may qualify for up to $54,884. If you haven’t claimed this credit in previous years, but realize now that you qualified for it, you can amend past tax returns to claim it after the fact.
Does Common Law Count?
If you’re in a common law partnership, you may be wondering whether these rules apply to you. Common law relationships are legislated under the state, and in January 2005, Pennsylvania abolished common law marriage. This means that only partnerships established prior to that date are recognized by the IRS; all more recently formed common law partnerships will need to file their taxes separately. If you’re interested in opening a spousal IRA account or want to discuss how to invest your tax return, we are here to help. Schedule a complimentary financial planning consultation today and let us help you get ready for tax season.