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To love, honor & deduct.

LOVE MAY BE BLIND, BUT THE Internal Revenue Service surely isn't. So, before you succumb to Cupid's potion-tipped arrow, remember that your marital status has a distinct impact on your taxable obligation to the government.

Death and taxes are inescapable. As for the latter, it doesn't matter whether it's your first trip down the aisle of matrimony, your second go-around or an unexpected detour to divorce court, you will have to pay the government its due.

Financial experts agree that African-Americans often exhibit a lack of communication when it comes to finances.

Blacks who are getting married often think, "Our love will take care of everything," says Glinda Bridgforth, president of Bridgforth Financial Management Group in Oakland, Calif. But, she warns, the hard reality is, "It won't."

According to an informal poll of industry professionals, African-American couples often run up against tax pitfalls because they:

* fail to discuss personal money matters early;

* overlook the other person's fiscal condition and the consequences of merging two financial profiles;

* lack good tax planning advice from a qualified financial planner, public accountant or financial analyst.

The following tips can help you enjoy a loving relationship while avoiding some taxing mistakes.

NEWLYWED STRATEGIES

Your tax strategy will vary depending on your individual situation. Still, honesty and clarity should be a priority for everyone contemplating marriage, advises Bridgforth. Couples need to get over the idea that "if we need to talk about money, you don't trust me or you really don't love me," she says.

To open up the lines of communication, engaged couples must talk honestly about individual financial goals, spending and saving habits, personal needs, household expenses and future spending plans. Are you a person who spends money freely? Is your spouse-to-be someone who can squeeze the shine off of a new penny? Are your personal expenses (such as grooming, medicine and clothing) in line with your partner's? These matters are too important to ignore.

Open communication will help you when it comes time to do your taxes. Let's say, for example, that you make a lot of money, but your spouse-to-be has a lot of debt. "Without knowing who owns what and who owes whom, things could get pretty complicated as far as the IRS is concerned," Bridgforth says.

Anita Conner, a CPA and principal of Anita T. Conner & Associates in Philadelphia, agrees. When one spouse makes significantly more than the other, it's a smart move to fill out two tax returns: (1) a joint return and (2) a married-but-filing-separately form. Then compare the returns in terms of your tax liability.

However, be sure to review this strategy as your incomes change over the years. Married couples who file separate tax returns typically pay the highest taxes; single filers follow close behind. Married people who file joint returns generally pay the lowest taxes, but their combined income usually boots them into a higher tax bracket.

And, if you change your name when you get married, don't forget to notify the Social Security Administration, warns Conner. When you file your first joint return, the IRS no longer receives a statement from you under your unmarried name. In many cases, nonfiling penalties are imposed on those who forget to inform Social Security about their new name.

To avoid another tax snafu, don't forget to change your W-4 form with your human resources department. When you get married, your withholding status changes. You will now be taxed as part of a married couple.

THE BRIDE WEARS RED

"If this is your second trip to the altar, you and your spouse-to-be really need to talk things out," says Bridgforth. "People getting married for the second time usually bring assets and dependents to the new marriage. You've got to include these things when computing your tax strategy for the year." Such assets often include pension plans, IRAs, insurance policies, investment holdings, cars and property. Dependents can include ailing parents as well as children.

If you and your spouse both own your own homes, for example, you may decide to sell one of them. If you decide to sell your house, keep in mind that you'll lose the itemized deductions on mortgage interest rates and real estate taxes. The sale will also count as a capital gain as far as the IRS is concerned.

If you decide to keep your home, you can sell a portion of it to your spouse, Conner says. This will lower your tax liability because the total value of your home will depreciate. And your spouse can take an additional itemized deduction.

Another option you have is to convert one home into rental property. As a landlord, you'll be able to take certain tax deductions. Note, however, that this is a complicated strategy; you'll need to consult a tax planning professional.

Whether it's a first or second marriage, it's a good idea to protect your income by purchasing a life insurance policy. Conner advises that you and your spouse take out a policy on each other. "That removes life insurance proceeds from the taxable estate, and saves money and time when distribution of the proceeds comes due," she says.

THE TAXABLE PAIN OF DIVORCE

If you think that marriage penalty taxation is a lot to deal with, consider the liabilities associated with divorced couples.

First, you must note your change in marital status on the W-4 form at work.

The next step is to draw up a settlement. But, "don't rely solely on lawyers," advises Conner. "You really need to get the opinion of a CPA and a financial planner as well."

The most frequent tax gaffe divorced African-Americans make is not looking at the tax liabilities that result from divorce. A prenuptial agreement can clarify which assets are going to remain with whom.

Failing a prenuptial agreement, it is important to remember the distinction between alimony and child support. Spouses who pay alimony can take a tax deduction. But spouses who pay child support cannot.

Conversely, spouses who receive alimony must declare it as income on their tax returns and pay taxes on it. However, child support payments are not counted as income and are therefore tax exempt.

If you're paying child support, it obviously makes sense to revamp your payment obligations and make that part of your alimony agreement. This way, you'll get the tax credit. Current tax law intensifies the issue of who gets custody of the children in a divorce. "The spouse with custody not only gets the head-of-household deduction, but can also sue for the tax-free child support," says Conner.

Whatever settlement you work out, if you get custody of your children, you'll receive a tax benefit through dependency deductions. If you don't retain custody of your children, you lose the dependency deduction. However, couples granted joint custody can rotate this deduction from year to year.

Divorce is an expensive contract, and the wrong information can make it even more so. Note that divorce is a contract, just like your marriage covenant. Child support, unlike alimony, is a court-awarded obligation that offers no exemption or deduction from your tax liabilities.

Alimony payments usually stop when you remarry; child support may not. It is wise to review the financial arrangements stated in your divorce decree as your income and circumstances change. For example, you'll want to pay child support for minor children, but you shouldn't still be paying for day care when your child goes off to college.

Although it's somewhat sexist, "The lyric `It's Cheaper to Keep Her' was probably inspired by tax laws that relate to divorce", Conner chuckles.
COPYRIGHT 1995 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1995, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:marital status is connected to tax status
Author:Mack, Gracian
Publication:Black Enterprise
Date:Apr 1, 1995
Words:1261
Previous Article:Profit from debt.
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