As the Holiday season approaches, I always have clients who's thoughts of gifts, decorations and traditions turn to how to pay for it all. Too many of them, plan their holiday spending on what they expect on their tax refund. Not a good idea under the best of circumstances but dangerous if there have been life changes.
For this post, I want to focus on one change - getting married. A happy event in most taxpayers' lives but it can cause a couple of nasty surprises. The first is the lost of a refund or increase in a balance due. Many credits and deductions are based on the income reported on the return. When two taxpayers get married, their income combines and is now too high for that credit. A single mom who qualifies for the max EIC marries a man earning a good living. Now their income is too high for EIC. And her withholding, while fine before, is not enough to cover her share of the tax. Nor is filing separate returns an option since EIC and some other credits are not allowed on a Married filing Separate return. Problems can range from under withholding to income phaseouts surprises. When two working taxpayers get married, they need to check with their tax preparer to plan for their tax changes.
There is an easy solution to the other nasty surprise I want to focus on, the solution is the Injured Spouse Allocation. You would be amazed at the number of times a new husband or wife doesn't learn about their spouse's debts until their joint return has been filed. Using the Injured Spouse Allocation, the debt free spouse can get their share of the refund. But it takes weeks to months to get the refund. And it will have to be done every time a joint return is filed and the debt is still on the books. The debt could be from child support, back taxes, student loan default. And some states have their own offset program. In Kansas, refunds can be taken for hospital bill and some utilities. But it is the nasty surprise of losing part of the refund and knowing they weren't warned about a problem before getting married that has caused a couple of heated scenes in my office.
Like all life changes, getting married should mean a visit to a tax professional for some serious planning. And it should trigger a quiet talk at home so both partners know what to expect when tax time comes.