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Getting married: a tax perspective.

More than 2.1 million couples get married in the U.S. each year (http://www.cdc.gov/nchs/nvss/marriage_ divorce_tables.htm). Few probably give any thought to the tax implications of their union. But taxes can have a big impact--positive or negative--on marriages. Tax advisors can provide valuable insight and guidance to those thinking about marriage or who have recently tied the knot.

Impact of Marriage on Tax Brackets

Married couples file joint income tax returns, unless they opt to file separately. The special tax brackets for a couple filing jointly may produce a smaller tax bill (i.e., a marriage bonus), or the brackets may result in a higher tax bill than if the individuals had remained single (i.e., a marriage penalty). The marriage penalty has been effectively eliminated up to the 15% tax bracket; above that threshold, the penalty may apply. As a rule of thumb, if each person individually has earnings and other income that would put them above the 15% bracket, there will be a marriage penalty. If one person does not work and the other does, usually there will be a marriage bonus.

There are other factors that can impact a couple's bonus or penalty. For example, if one person has capital loss carryovers while the other has capital gains, a marriage puts the carryovers to immediate use, saving the couple taxes overall. In addition, marriage may trigger or increase--

* the net investment income tax,

* the phaseout of itemized deductions, or

* the phaseout of personal exemptions.

Marriage also affects various income limitations. For example, capital losses in excess of capital gains can offset $3,000 of ordinary income. This limitation applies per return, not per taxpayer; that is, a $3,000 limit applies to joint filers and single taxpayers, and a $1,500 limit applies if married persons opt to file separately. Many other tax breaks have income limitations for joint filers that are more than those for other filers but not double the amount allowed for singles, meaning a couple filing jointly may have less favorable outcomes than if they remained single. Some examples of such limitations include--

* the earned income tax credit,

* the alternative minimum tax exemption,

* an additional standard deduction amount,

* an overall limitation on itemized deductions,

* a phaseout of personal exemptions,

* Roth IRA contributions,

* contributions to traditional IRAs by active participants, and

* the child and dependent care credit.

As noted earlier, married persons can choose to file separately. This may be advisable where one spouse is concerned about the tax liability of the other, because joint filing makes each spouse jointly and severally liable for the tax on a joint return. But in many cases, the tax rules for filing separately are less favorable than the rules for singles. At the very least, deciding whether to file jointly or separately requires a complex assessment of itemized deductions, tax brackets, and tax liability.

Concerns for Older Couples

When older individuals marry, taxes are not the only issue. The union may be a positive or a negative when it comes to various federal and state benefits programs and other benefits that one or both are already receiving. For example, marriage entitles one spouse to qualify for Medicare based on the other spouse's eligibility. Marriage also allows a spouse to collect survivor benefits following the death of the other spouse. Marriage may, however, also cause the loss of benefits that one or both spouses are already enjoying from a prior marriage. These may include alimony, veterans' benefits, public safety officer pensions, or other benefits. For example, if one person is collecting Social Security benefits with respect to a prior spouse, such benefits may be lost upon remarriage, although the affected spouse might still be able to obtain greater benefits overall.

Another consideration is the potential advantage of suspending Social Security benefit payments. If spouses are at full retirement age, one of them can apply for retirement benefits currently but have them suspended, while the other spouse applies for only spousal benefits. This allows both spouses to delay receiving benefits and receive delayed retirement credits.

In addition, marriage may create liability for each other's medical expenses, depending on state law. If one spouse applies for Medicaid for long-tenn care, the income and assets of both spouses come into play.

Timing

Marital status is determined as of the last day of the year. Those who marry on December 31 are treated as married for the entire year; conversely, those who divorce on December 31 are treated as unmarried for the entire year. Couples with the flexibility to schedule their marriage ceremony may want to consider whether there will be a marriage bonus or a penalty and pick a date accordingly. In the case of a bonus, the sooner the marriage takes place, the sooner the couple can save on their combined taxes. If the marriage would result in a penalty, however, setting a date for the following year at least forestalls the tax impact for one year.

Of course, other factors come into play in setting a date for the marriage. For example, if one person has generous employer-paid health coverage while the other is paying for individual coverage out of pocket, marriage will save on health pre miums. Note that under the Affordable Care Act, large employers must provide affordable coverage for an employee, spouse, and dependents.

Paying Taxes

When a couple marries, they may need to change their wage withholding or estimated tax payments accordingly. For example, if one spouse is working while the other is not, the working spouse can reduce withholding because of the marriage bonus. If a marriage penalty is on the horizon, however, withholding and estimated taxes should increase to avoid underpayment penalties.

Tax Strategies for Newlyweds

Newlyweds should review their employee benefit options to choose the best benefits for the couple. If each spouse's employer offers a 401 (k) or similar plan and the couple has limited funds for contributions, determine where to put the funds. For example, if one employer matches contributions while the other does not, opting to make the matched contributions will likely generate greater retirement savings overall.

If one spouse works and the other does not, determine whether the worker can make a contribution to an IRA for the nonworking spouse. Called a Kay Bailey Hutchison IRA or spousal IRA, this is an opportunity to save for retirement and save taxes as well. This can be used for both traditional and Roth IRAs. The contribution limit applies per spouse, but the working spouse must have earnings at least equal to the contributions for both spouses.

Planning for the marital residence can be helpful. For example, if each spouse separately owned a home prior to marriage and they decide to live in one and sell the other, advisors should project the home sale exclusion of gain on the one that will be sold. If the nonowner spouse did not live in the home for at least two years prior to the sale, the exclusion, assuming the owner spouse qualifies, is limited to $250,000.

Second Marriages

Spouses who have been married before may have concerns about their assets and other matters should the new marriage not last. A prenuptial agreement can relieve tension by clarifying certain matters (e.g., whether there is a waiver of alimony and support in the event of divorce). The agreement cannot be used, however, to waive spousal rights in qualified retirement plans. This must be done after the marriage, but the agreement can require such a waiver to be made at that time.

There may also be unique estate planning concerns for second marriages, especially when there are children from prior marriages. Parents may want to protect their children's property interests. Advisors should assess the size of each spouse's potential estate to determine whether estate tax planning is necessary. Advisors should also ascertain the answers to the following questions:

* Who should be the executor of the estate or trustee of any inter vivos or testamentary trusts?

* Is there a need for the surviving spouse to receive property or support?

* Is a qualified terminable interest property (QTIP) trust advisable?

Other Considerations

The name used on a tax return must match the name on file with the Social Security Administration for the Social Security number associated with that name. If one or both of the newlyweds changed their name on the marriage certificate, it is essential to notify the Social Security Administration by filing Form SS-5. The form can be obtained online, but the completed form and documents showing the new name must be submitted by mail or in person at a Social Security office.

It is also important to inform the IRS of an address change (using From 8822) if anyone moves after the marriage.

Planners should advise couples to take the time to obtain a credit report. A review of a married couple's credit history can uncover unknown discrepancies or problems. Many newlywed couples want to purchase a home together in the future. Addressing any credit issues early will allow both spouses time to resolve the issues and restore their credit score.

Nontax Issues

Getting married triggers a number of financial and legal issues for couples to address. For example, will everything, including bank accounts and credit cards, be held jointly, or will spouses maintain them separately? If one spouse owns a home, does the couple want to add the name of the other to the title?

Marriage can also impact various documents that may need to be revised to reflect the nuptials and the new needs or intentions of the spouses. Some documents to review include--

* living trusts;

* beneficiary designations on qualified retirement plans, IRAs, annuities, and life insurance policies;

* durable powers of attorney; and

* healthcare proxies.

Changes should be made to the beneficiary elections of each of the spouses' 401(k)s, IRAs and other retirement plans. Planners should review the titling of investment accounts, bank accounts, and loans to make sure that the most appropriate form of ownership is reported. The Supreme Court held in June 2014 that an inherited IRA is not deemed as "retirement funds" under Bankruptcy Code section 522(b)(3)(C) and is not exempt from creditors [Brandon C. Clark et ux. v. William J. Rameker, Trustee, et al, 573 U.S._(2014)]. In light of this decision, spouses should consider naming a specific type of trust as a beneficiary of their qualified plans or IRAs.

Advisors should help the couple decide upon the best insurance carriers for the various different types of insurance that both spouses begin the marriage with. If both spouses are employed, the differences in their health policies should be reviewed to determine which one is more beneficial, financially and medically. Homeowners' or renters' insurance should also be updated. Notify the insurance carrier if the marriage now increases the value of the personal items when combined into the joint household to make sure all items are covered in the event of a disaster. If both spouses are renting, pick the better of the two insurance companies. In addition, auto insurance is a great place for savings; typically, it is less expensive when a married couple obtains an insurance policy.

This may also be a good time for newlyweds to totally reevaluate all of their insurance policies. When multiple types of insurance policies are combined, an insurance carrier will generally provide additional discounts. Insurance carriers that neither spouse has experience with may provide better insurance and a lower combined rate quote than either spouse had before getting married. The need for obtaining life insurance policies should also be reviewed. If neither spouse begins the marriage with life insurance, advisors should perform an evaluation to provide guidance.

Expanding Services

Working with couples on the financial aspects of their marriage can provide valuable assistance while expanding the services provided. To be most effective in providing guidance, CPAs should develop a network of professionals who can provide specific services. For example, attorneys who can draft the necessary legal documents and insurance agents who can provide the products now needed. The benefit to clients, and to the CPA, will be much increased.

Sidney Kess, JD, LLM, CPA, is of counsel to Kostelanetz & Fink and a senior consultant at Citrin Cooperman & Company, New York, NY. He is a member of the NYSSCPA Hall of Fame and was awarded the Society's Outstanding CPA in Education Award in May 2015. He is also a member of Vue CPA Journal Editorial Board. James R Grimaldi, JD, CPA, and James Revels, CPA, MST, are partners at Citrin Cooperman & Company.

SAME-SEX MARRIED COUPLES RECOGNIZED

Due to recent decisions from the U.S. Supreme Court, same-sex married couples must be treated the same as opposite-sex married couples for all federal purposes (e.g., income taxes, Social Security benefits), as well as on the state level.

For federal tax law purposes, the IRS will recognize the marriage of two people if the marriage is recognized by any state, U.S. possession, or U.S. territory. It will also recognize a marriage performed in a foreign country as long as at least one state, possession, or territory recognizes the marriage. In proposed regulations, the IRS recently clarified the terms "spouse," "husband," and "wife" to make it clear that they refer to any person legally married to another person (NPRM REG-14998-13).

For state income tax purposes, there may be tax refund opportunities for same-sex couples that file amended returns for open tax years.

TAX CHECKLIST FOR GETTING MARRIED

* Make sure that a name change is reported to the Social Security Administration.

* File Form SS-5.

* Make sure that the names/Social Security numbers on tax returns are consistent.

* Where possible, time the marriage to avoid the marriage penalty or use the marriage bonus.

* Consider tax brackets.

* Factor in the Net Investment Income tax.

* Consider the phaseout of personal exemptions.

* Use tools to assess the marriage penalty or marriage bonus (e.g., http://www.taxpolicycenter.org/mpc).

* If both spouses work, coordinate employee benefits.

* Decide which health plan to use if employers of both spouses offer coverage.

* If spouses cannot afford to maximize contributions for each 401 (k), decide how much to contribute and to which plan.

* For elderly couples on Social Security, determine the impact of the marriage on their benefits (including the amount of benefits and taxation of them) before tying the knot.

* Adjust withholding and estimated taxes in light of the marriage.

* If a home or homes is owned prior to marriage, decide on a sale or sales and the impact of the home sale exclusion.

* Utilize spousal IRAs if one spouse does not have earned income.

* Change beneficiary designations on IRAs, qualified retirement plans, annuities, and life insurance policies.

* File separate returns after marriage if one spouse has outstanding liabilities that the other should avoid; joint filing can be done after the debts have been paid off or resolved.
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Title Annotation:COLUMNS: personal financial planning
Author:Kess, Sidney; Grimaldi, James R.; Revels, James
Publication:The CPA Journal
Date:Mar 1, 2016
Words:2490
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