Basic Financial Planning for Newlyweds
Step 6: Work Through a Tax Projection (to avoid any surprises next April)
Your Initial Financial Plan:
Have You Read...
Taxes for Dummies
The fun and easy way to maximize your deductions and minimize the pain! With the 2001 tax cut, just about everyone will have a lower tax bill. But with all the complicated phase-ins and special provisions, how do you get your fair share of the $1.35 trillion in tax relief? Don't worry! With the line-by-line instructions and unbeatable year-round tax-saving tips in this friendly guide, you'll find out how to maximize your tax deductions now and in the years ahead.
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The Marriage Penalty
Did you know that married couples comprised of two working spouses generally pay more in taxes than if they had remained single? As a matter of fact, if you and your spouse each make $150,000, you could pay more than $1,000 in additional taxes. The more you each earn, the higher the marriage penalty.
To make matters worse, less taxes are withheld from people claiming to be "married" on their Form W-4 than those claiming to be "single". The reason for this is that the withholding tables assume that your spouse doesn't work. Most married couple comprised of two working spouses who earn a similar amount of money should continue to have taxes withheld as if they were single; unless they own a home with a mortgage or have other sizable tax deductions.
Due to the combination of the marriage penalty and the withholding (W-4) problem, it's not uncommon for newlyweds to owe thousands of dollars in taxes the first year they file a joint return! To avoid any surprises next winter, it's critical that you plan ahead and work through a tax projection, especially the first year you're married.
Recent Tax Law Changes
The tax cost of being married is going down again, thanks to the Jobs and Growth Tax Relief Reconciliation Act of 2003 passed by Congress and signed into law by President Bush during June, 2003.
Under the current tax rules, a married couple comprised of two working spouses generally pay more in taxes than if they had remained single. This tax trap is known as the marriage penalty. The 2001 Tax Act instituted some changes to reduce the marriage penalty, but the changes weren't slated to take effect until 2005.
Fortunately for married couples, the 2003 tax-cut package provides some immediate relief from the marriage penalty. For 2003 and 2004, the standard deduction for a married couple will be exactly double the standard deduction of a single individual. Prior to this change, a married couple that didn't itemize would have claimed a deduction of $7,950, while two unmarried non-itemizers would be allowed a combined deduction of $9,500.
The 2003 Tax Act also increased the 15% tax bracket to be double that of a single person. Prior to this tax act, the 15% tax bracket would have ended at $47,450 for a married couple, as compared with $56,800 for two single people. That means a tax savings of about $1,000 for most married couples this year.
The 2001 Tax Act
The Economic Growth and Tax Relief Reconciliation Act of 2001 was passed by Congress on May 26, 2001, and signed into law by President Bush on June 7, 2001. The new tax law provides $1.35 trillion of tax cuts over the coming decade.
One area addressed in the tax act was the marriage penalty. To provide some relief, the new law gradually increases the standard deduction for married filing jointly to twice the standard deduction of single filers, beginning in 2005. In 2001, the standard deduction for a single individual is $4,550 while the standard deduction for a married couple is only $7,600.
Also beginning in 2005, the 15% tax bracket for joint filers will be gradually expanded to double the 15% bracket for single filers. In 2001, single individuals are taxed at a rate of 15% on the first $27,050 of taxable income while the 15% bracket for married couples ends at $45,200.
Unfortunately, married couples who are in the higher tax bracket or who itemize their deductions won't benefit much by these two changes.
Other Tax Issues for Newlyweds
Here's a few other tax matters that you should be aware of now that you're married:
Q: What do you say to your spouse when you see how much taxes you're paying now that you're married?
To minimize your annual tax burden, here's some steps that you can take:
Here's some additional articles about personal income taxes that you might find interesting:
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