Tax Considerations & Marriage Penalties for Middle Class Families

 Posted on August 06, 2014 in Family Law

When a couple decides to get married, buy a home, have children, and plan for their future retirement, they must think about the tax consequences at every step in the process to maximize the financial consequences of each event in their lives. Speaking with an attorney versed in family law can help ensure that the couple is on the right track, and can be of assistance in the event of divorce or other family-related issues.

Marriage

When a couple gets married, they may be subject to both marriage penalties and marriage bonuses. A marriage penalty occurs when a couple pays more income tax filing jointly as a married couple than filing separately as individuals. A marriage bonus is the reverse and occurs when a couple pays less tax filing jointly than filing separately as individuals.

If spouses have similar incomes, they are more likely to encounter marriage penalties. This happens because, by combining their incomes in a joint filing, they might be placed into a higher tax bracket. If one spouse is the exclusive income earner, he or she will most likely receive a marriage bonus. This generally happens because joint filing moves the higher earner’s income into a lower tax bracket.

In 2001, the tax code was changed to increase marriage bonuses and decrease marriage penalties. The standard deduction for filing jointly as a married couple is twice that for single filers. The income ranges for the 10 to 15 percent tax brackets are also twice that of single filers.

Home Ownership

The tax code provides a number of benefits for people who own their homes in the form of deductions. Homeowners may deduct both mortgage interest and property tax payments from their federal income tax.

Homeowners do not have to include the rental value of their homes as taxable income. Homeowners may also exclude the capital gain they get should they decide to sell their home; however, there is a cap on the exclusion. Finally, homeowners may deduct interest paid on home equity debt. The cap for that is $100,000.

Having Kids

The child tax credit reduces a married couple’s taxes by $1,000. Married couples with an adjusted gross income of $110,000 or under qualify for the full credit. The couple can claim it every year on their taxes until their child reaches the age of 17.

There are also tax credits available that help lower the cost of child care. If the couple has children under the age of 13, they may be eligible for a 20 to 35 percent credit. The cap is $3,000 for one child, or a total of $6,000 for two or more children. Eligible expenses may include paying for a nanny or babysitter, preschool school care, and summer day camp.

If a parent participates in his or her employer’s flexible spending account for dependent-care expenses, he or she may qualify for additional deductions. A parent can contribute a maximum of $5,000 a year, and the money is deducted from the parent’s gross salary before taxes.

Saving for Retirement

A tax break that favors long-term retirement planning is the Retirement Savings Contributions Credit or Saver's Tax Credit. If you are 18 or older, not a full-time student, and are not claimed as a dependent on another person’s tax return, you can qualify for this credit.

You can take a tax credit for making eligible contributions to your IRA or employer-sponsored retirement plan like a 401(k) or 403(b). The amount of the credit is 50, 20 or 10 percent of your IRA contributions or retirement plan. The cap is $2,000 for an individual or $4,000 if married and filing jointly. The amount will depend on your adjusted gross income.

Resources

Seeking a knowledgeable advisor at each milestone is critical in order to avoid some of the tax penalties a couple can face throughout their marriage. For more information about these or any other family law issues, please contact an experienced DuPage County family law attorney.