On Valentine’s Day, first Cupid may have struck you followed by marriage. Around 10% marriage proposals are made on Valentine’s Day. Amidst all the celebrations, tax season may hover over you like it has over all the other star-struck couples.
Post Valentine’s Day, you may make a number of major life decisions, apart from exchanging the marital vows such as having a child or a home purchase. These prominent milestones do affect the way you’d file your taxes.
So, how do you prepare yourself for the tax challenge immediately after Valentine’s day?
Your taxes post Valentine’s Day in 2017
To help you plan your taxes efficiently as a married couple this tax season 2017, you can bet on the following tax tips:
1 Educational incentives
The Internal Revenue Service (IRS) provides American Opportunity Credit for as much as $2,500 in terms of costs incurred like college tuition and other associated expenses, paid throughout the year, but not accommodation/boarding expenses. Full tax credit is provided to individuals having modified adjusted gross income (MAGI) of $80,000 or lower. In case of married joint tax return filers, the same is $160,000 or lower. However, single taxpayers having MAGI over $90,000 and married couples having MAGI more than $180,000 are ineligible for the tax credit.
2 Tax filing status
Irrespective of the day you marry in 2017, your tax filing status will be considered based on your marital status as on 31st December. Hence, you’ll be regarded as married throughout the year 2017, even if you’ve married on December 31st. You have the option to either file your taxes jointly or separately. However, it’s good to prepare your taxes on both grounds to figure out the lowest amount, combining both federal as well as state taxes.
3 IRA contributions
If you’re married and are covered by a retirement plan at work, then you’re eligible to deduct your contributions to a traditional Individual Retirement Account (IRA). However, your joint income should be below $118,000 in 2016 and you’ll start losing the deductions as soon as your income goes beyond $98,000. On the other hand, if you’re not covered by a retirement account at work but your spouse is and your joint income is below $194,000, then all your IRA deductions will be considered as tax deductible by the IRS. The amount of deductions will start to diminish once your joint income move upwards of $184,000. Interestingly, if neither you nor your spouse is covered under a retirement plan, then there’s no cap on the income for making tax deductible contributions towards your IRA.
4 Taxable amount
A lot of people see their taxes go down when they file their taxes jointly instead of filing as single. It happens, most often, because either of the spouses earn more than the other. But, spouses whose total income is almost similar, then they end up coughing up more combined taxes (federal and state) than others. Mostly, high earners experience this kind of financial situation. As per the taxable income rate slab observed by the IRS, single filers with an income of $418,401 and joint filers with an income of $470,701 will be taxed at the top rate of 39.6%. Take for instance, you and your partner are unmarried with each earning $250,000 per annum, then you’ll not be taxed based on the top marginal rate. But, after marriage, you’ll be liable to pay taxes per the top rate, if your combined annual income is $470,701.
5 Tax advantages
There are number of tax advantages for married couples. Some of them are:
- You may enjoy greater tax exemption on capital gains made out of your primary residence. According to the IRS tax code, you’re exempted from paying taxes on capital gains of not more than $250,000 on your principal home of residence. But, when you’re married, then that same exemption amount increases to $500,000 in many cases.
- On a joint tax return, you’re provided greater tax deductions, if you combine your costs like charitable deductions, state and local taxes.
- In case of gift tax, you’ll reap better returns when you’re married. At present, the IRS may provide you a yearly federal gift tax exclusion of $14,000. Moreover, you and your spouse can club the tax exclusion for any one person to $28,000.
6 Child tax credit
If you’re planning to have a child or if you already have children, then you can qualify for a good amount of tax exemptions as child-rearing couples for each one of them. Child Tax Credit is provided to many families. However, there’s an income cap to it. You can reduce your tax liability by almost $1000 against every eligible child. Make sure you understand the rules of these tax breaks before applying for them.
At this phase of your life, you may hate to discuss about as tasteless subject as money and taxes. However, it's crucial for the success of your budding relationship with your new found love of your life. And how can you can forget your blossoming affair with the IRS, post your Valentine’s Day exploits?
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