When you’re married, your financial situation is no longer just about “me” – it’s about “us.” This shift doesn’t only impact how you handle your household budget, but also how you approach tax planning. Whether you’re a dual-income household or one partner stays at home, understanding how marriage affects your taxes is crucial. With the right tax strategies, married couples can significantly lower their tax liability, save money, and make smarter decisions for their financial future.
In this guide, we’ll explore the tax benefits, strategies, and tips married couples can use to optimise their tax filings and keep more of their hard-earned income. From choosing the right filing status to leveraging deductions, we’ll show you how to make tax planning a part of your overall financial strategy.
1. Understand Your Filing Status Options
1.1 Married Filing Jointly
This is the most common filing status for married couples. Filing jointly combines both spouses’ incomes and allows you to take advantage of various tax breaks, such as:
- Higher income thresholds for tax brackets.
- Increased standard deduction.
- Eligibility for tax credits like the Child Tax Credit.
1.2 Married Filing Separately
While this option can be beneficial in some cases, it typically results in a higher tax bill. It may be worth considering if:
- One spouse has significant medical expenses or deductions.
- There are concerns about one spouse’s tax liabilities or obligations.
2. Leverage the Marriage Bonus
2.1 Lower Tax Bracket
When you file jointly, your combined income is taxed at a lower rate than if you were to file individually. The IRS provides larger tax brackets for married couples, meaning you may end up in a lower bracket than if both spouses filed separately.
2.2 Deductions and Credits
Married couples filing jointly have access to larger deductions and credits. These include:
- Standard Deduction: The standard deduction for a married couple filing jointly in 2023 is $27,700.
- Child Tax Credit: Couples can claim up to $2,000 per child (subject to income limits).
3. Contribute to Retirement Accounts
3.1 Maximise Contributions to Retirement Accounts
Retirement account contributions can significantly lower your taxable income. Married couples can maximise contributions to:
- 401(k): Each spouse can contribute up to $22,500 in 2023 ($30,000 if over 50).
- IRA: Contribute up to $6,500 each, or $7,500 if over 50. By putting more into retirement, you reduce your taxable income today while saving for your future.
3.2 Spousal IRA
If one spouse is not working, the working spouse can contribute to an IRA on behalf of the non-working spouse, helping both partners save for retirement.
4. Consider Income Splitting
4.1 What Is Income Splitting?
Income splitting involves redistributing income between spouses to lower the overall tax burden. This works particularly well if one spouse is in a higher tax bracket than the other. By shifting income, you can reduce the amount of taxable income that falls into the higher bracket.
4.2 How to Do It
Consider strategies such as:
- Shifting investment income or business income.
- Opening joint investment accounts.
5. Take Advantage of Tax-Advantaged Accounts
5.1 Health Savings Account (HSA)
If you have a high-deductible health plan (HDHP), you can contribute to an HSA. Contributions are tax-deductible, and withdrawals for qualifying medical expenses are tax-free.
5.2 529 College Savings Plan
If you’re saving for your child’s education, consider using a 529 plan. Contributions are made with after-tax dollars, but earnings grow tax-free, and withdrawals for educational expenses are also tax-free.
6. Maximise Your Deductions
6.1 Standard vs. Itemised Deductions
While most married couples will claim the standard deduction, it’s worth considering itemising if your deductions exceed the standard amount. Common deductions include:
- Mortgage interest.
- State and local taxes.
- Charitable donations.
6.2 Other Deductions to Consider
- Medical Expenses: If you or your spouse have significant medical expenses, you can deduct the amount that exceeds 7.5% of your adjusted gross income.
- Student Loan Interest: You can deduct up to $2,500 in student loan interest, depending on your income level.
7. Consider the Tax Implications of Your Investments
7.1 Tax-Efficient Investments
Choose investments that are tax-efficient, such as municipal bonds, which are exempt from federal taxes. You can also invest in tax-advantaged accounts to reduce your tax burden.
7.2 Capital Gains
If you sell investments, capital gains taxes apply. The tax rate depends on how long you’ve held the investment. Holding investments for over a year results in long-term capital gains, which are taxed at a lower rate than short-term capital gains.
8. Plan for Healthcare Expenses
8.1 Health Insurance Premiums
Married couples can share health insurance, but it’s essential to know how your health insurance premiums affect your taxes. If you purchase insurance through the marketplace, you may qualify for premium tax credits.
8.2 Flexible Spending Accounts (FSAs)
FSAs allow you to save pre-tax dollars for medical expenses. If both spouses have access to an FSA, you can each contribute up to $3,050 (2023 limit) to save on taxes.
9. Be Aware of the Marriage Penalty
9.1 What Is the Marriage Penalty?
In some cases, married couples may face a marriage penalty, which happens when your combined income pushes you into a higher tax bracket than if you were single. This is more likely to happen if both spouses earn high incomes.
9.2 How to Mitigate the Penalty
Consider tax strategies such as:
- Maximising deductions to lower taxable income.
- Shifting income through gifts or contributions to retirement accounts.
10. Review and Update Your Tax Plan Annually
10.1 Why You Should Review Your Taxes Regularly
Tax laws change, and your financial situation may evolve. Reviewing your tax plan annually allows you to take advantage of new deductions, credits, or tax brackets. It also ensures that your filing status and strategies are still appropriate for your current situation.
10.2 When to Seek Professional Help
If your tax situation becomes complex, consider consulting with a tax professional. A financial advisor can help you implement strategies that align with your financial goals and reduce your tax burden.
Conclusion: Take Control of Your Tax Situation
Tax planning isn’t just about filing your taxes—it’s about making proactive decisions throughout the year to minimise your tax bill and keep more money in your pocket. Married couples can benefit from a variety of tax-saving strategies, from choosing the right filing status to contributing to retirement accounts and maximising deductions. By staying organised, planning ahead, and reviewing your situation regularly, you’ll be able to optimise your taxes and secure a more financially stable future together.
FAQs
1. Should we always file taxes jointly as a married couple?
In most cases, filing jointly is beneficial. However, if one spouse has significant liabilities or other concerns, filing separately may make more sense.
2. Can I contribute to a retirement account if my spouse doesn’t work?
Yes, you can contribute to a retirement account on behalf of your non-working spouse through a spousal IRA.
3. How can we avoid the marriage penalty?
Maximise deductions and contribute to tax-advantaged accounts to reduce your taxable income, which may help avoid the marriage penalty.
4. Are medical expenses deductible if they exceed a certain amount?
Yes, you can deduct medical expenses that exceed 7.5% of your adjusted gross income if you itemise your deductions.
5. Can we both claim the Child Tax Credit?
Yes, both spouses can claim the Child Tax Credit if you file jointly.
6. How do I choose the best tax-advantaged accounts?
Choose accounts based on your financial goals, whether it’s saving for retirement, healthcare, or education. Speak to a tax advisor for personalised recommendations.
7. How often should we revisit our tax planning?
It’s a good idea to review your tax plan annually or whenever your financial situation changes.