How does marriage affect taxes?
Tax probably shouldn’t be the main reason for someone to choose to get married. Love, commitment, companionship and family are all good reasons, the tax benefits are just a bonus (and it helps to take the sting out of the cost of a wedding).
Initially, most US taxpayers will file as “Single” until the year they are legally married. A couple are considered married for an entire year (for tax purposes) if they are married on December 31st. Once married, the couple have a choice whether to combine their taxes and filing jointly (Married Filing Jointly – MFJ) or continue to file separately (Married Filing Separately – MFS).
Why filing jointly?
Filing jointly offers more generous tax rates and allowances often resulting in a lower net tax liability. The standard deduction for joint filers is the largest available – $29,200 for 2024. Alternatively, they would combine their deductions to lower their taxable income and utilise available benefits such as Earned Income Credit, Child & Dependent Care Credit and Lifetime Learning Credit which are often not available to those filing separately.
For a married couple living in the US, it is nearly always more tax efficient to file jointly. This changes slightly for those living abroad…
So, why would someone file separately?
In some cases, particularly with taxpayers abroad, it can be advantageous to file a separate return. There are also some good planning opportunities available to reduce taxes where one spouse earns significantly more than the other.
For example, Mr & Mrs Z live in the UK. Mrs Z is a high earner and Mr Z has no income. They have a US investment portfolio and a US rental property.
- On a joint return, their investment income will be subject to the highest income tax rate plus net investment income tax due to Mrs Z’s high level of earnings. They live in the UK, so no tax liability will arise on Mrs Z’s earnings directly (due to available foreign tax credits), but it will increase the effective rate on other sources of income exposed to US tax.
- On a separate return, Mr Z would report 50% of the investments and rental profit only, benefitting from the lower income tax rates without Mrs Z’s high earnings. Mrs Z’s 50% share will be subject to a higher rate on her return but the overall effective tax rate on the investments will be lower.
- Planning opportunities – assuming Mr Z will continue to have no earnings, putting all the investments and properties in his name will further reduce the income tax exposure.
What if my spouse is not an American?
Non-US citizens or residents (Non-Resident Aliens – NRA) are not obligated to file a US tax return. So, for US taxpayers married to NRAs, they would file separately unless they make an election.
A 6013(g) election allows the NRA spouse to be treated as a US resident for tax purposes, enabling the couple to file a joint return and benefit from the lower tax rates, higher deduction and maximise eligibility for tax credits.
The downside is that the NRA spouse’s income and investments are exposed to US tax and will continue to be until the election is formally revoked. This is a one-time election; so, once revoked, it can never be claimed again.
The election is generally only beneficial where the NRA spouse’s financial situation is relatively straightforward and does not create any additional tax reporting issues. It is common when a couple leave the US. If one spouse were not American, they would need to file a separate dual status return. To avoid preparing two returns and simplify the tax filing processes, it’s often easier to make the 6013(g) election.
It is also common to make a similar election when moving to the US. If the NRA spouse becomes a resident during the year a 6013(h) election can be made to treat them as a full year resident. Again, this is a one-time election and neither spouse will be eligible to make this election in the future.
Are there any other filing statuses?
Yes, Head of Household and Qualifying Surviving Spouse. They both provide favourable tax positions for those who are disadvantaged.
Head of household is essentially for single parents who pay for more than half the support for themselves and their child.
The Qualifying Surviving Spouse status can be used for 2 years after the death of a spouse.
There is more to both these filing statuses, but they are not discussed further here.
Can you change filing status?
Other than for obvious reasons (death or divorce), it is still possible to change filing status based on financial and tax situations. Altering filing status to save tax is a common tax planning opportunity but it does come with its complications. Separating all the details on a joint return can be very time consuming and sometimes has a negative impact on one spouse.
It is worth noting that it is not possible to switch to married filing separately on an amended return. But it is possible to go from MFS to MFJ.
In summary, while marriage can bring tax benefits, it’s important to consider your unique financial situation and consult with a tax professional to make the best decision.
This article does not constitute tax advice. For more information, please get in touch.