Tax Planning for Married Couples
It's no secret that managing finances can be tricky, especially when you're trying to do it as a team. Planning your taxes as an engaged or married couple, it is important to know that you and your spouse can take advantage of certain tax breaks and exemptions. Tax planning is an important way to save money. That’s why it’s always a good idea to sit down and talk about keeping finances in order even before tying the knot. By taking advantage of the deductions and credits available, couples can reduce their tax liability, increase savings, and build wealth.
Married couples have several tax planning opportunities that are different from those that are available to unmarried individuals. One of the most important is the ability to file a joint tax return. This can often result in a lower tax bill than if the couple filed separately.
When filing a joint tax return, the process is relatively simple. The first step is to determine which tax bracket you and your spouse fall into. The tax bracket will determine how much you owe in taxes. Couples with significant earning differences between them can actually save more by filing a joint tax return. That's because both spouses' incomes are combined in determining their tax bracket. So if one spouse earns considerably less than the other, they may be pulled down into a lower tax bracket, thereby reducing the couple's overall tax liability. Of course, there are other factors to consider as well, such as whether or not each spouse has their deductions and credits. But all things being equal, couples with large earning disparities between them can save money by filing a joint tax return.
Gift tax is another thing married couples can take advantage of. It applies to both real and personal property, including gifts of cash, stocks, and other assets. In most cases, the person who gives the gift (the donor) must file a gift tax return with the IRS. The gift tax limit for married couples is much higher than for individuals. For 2023, a husband and wife can give a total of $17,000 per year to any number of people without having to file a gift tax return. This doubles to $34,000 if they are both gifting the same person. However, any gifts above this amount will be subject to the gift tax.
Married couples can also benefit from estate tax advantages. When the husband or wife dies, their assets can be transferred to the surviving spouse without any estate taxes being due. This is known as the unlimited marital deduction. In addition, if the couple has lived in a state with an inheritance tax, that tax will be waived for property passing to the surviving spouse. Most states offer some form of exemption from their estate taxes for spouses.
If ever a married couple wants to sell their house, the personal residence exemption is one thing to take advantage of. You may be a candidate for excluding up to $500,000 of the gain if you and your spouse file a joint return. It’s important to note that this exemption only applies to principal residences. If you want to sell a second home or an investment property, you will not be able to claim the exemption for them.
Another thing that can help married couples stay on track with taxes is contributing to a joint flexible spending account (FSA). This way, you can both take advantage of the tax benefits and have a shared goal to work towards. Plus, it can help to cut down on arguments about money since you'll both be working towards the same financial goal. Of course, there are a few things to keep in mind before you open up a joint FSA. For one, you'll need to make sure that both of your employers offer FSAs. And secondly, you'll need to decide how much each of you will contribute to the account. But if you're able to meet those criteria, a joint FSA can be a great way to save money as a married couple.
There can also be disadvantages depending on many factors like income, debt, and health. In 2023, in particular, it is important to work with a tax professional to understand how the COVID-19 pandemic has impacted tax rules for those who are married. Ultimately, the best approach will vary based on a lot of factors and each couple's situation. By carefully planning their taxes each year, married couples can minimize their liability and keep more of their money. To know more of the benefits married couples can enjoy, working with an accountant or tax lawyer you can trust can help ensure that you are paying the lowest possible amount of taxes as husband and wife.
This article was written by our guest blogger, Chatty Garrate.