Just when Spring Fever is about to burst out, the reality that there is no romance without finance has to be addressed. Marriage is taxing – I don’t just mean that it is a lot of work emotionally or physically – rather there are financial tax consequences if you are married as of December 31st.
Your tax status is synonymous with your marital status. If you are married at the stroke of midnight on December 31st, then you are considered married for tax purposes for the entire year. It does not matter what your heart says or what your Facebook status lists, New Year’s Eve is the bright line test.
Since money is so often the focus of marital disputes, you owe it to yourself and to your marriage to analyze the consequences of saying “I Do” to Uncle Sam in March of each year before you start the annual walk down the aisle of joint returns. You also owe it to yourself to understand the actual financial facts of your relationship.
While in general most married couples save money if they file jointly, each couple still should have a professional calculate the actual amount of taxes that have to be paid if they were to file jointly or separately for the past tax year. Ideally, this determination should be made before estimated tax payments are made using both parties’ Social Security numbers. Combining spouses’ incomes can result in more taxes being paid than if each party had filed separately. This is what is known as the "marriage penalty". For most couples, especially when there is a significant disparity in the spouses’ incomes, there is a "marriage bonus" that can be realized by filing together but in all events you should understand the reality of your family’s finances.
For a married couple where one of you has concerns about the future of the relationship or of the financial integrity or solvency of your spouse, it is essential that you consult with a professional before blindly sending a copy of your driver’s license to your accountant and participating in filing a joint tax return.
Cosigning a joint tax return exposes you to the tax liabilities, penalties and interest of your spouse, whether you have or had access to the income or not or will be entitled to the underlying asset in the event of a divorce.
Cosigning a joint tax return with a spouse who has an ex-spouse or two may expose your finances and financial history to scrutiny by their ex-spouses which risk may not be worth the tax savings coupled with the additional professional fees.
If your marital relationship is fragile, it is especially important that if you participate in filing a joint tax return with your spouse you either sign a tax indemnification agreement which is a document which allows parties to allocate the financial responsibilities for the taxes, penalties and interest as between themselves and also can allow you to challenge the veracity of your spouse’s claims as to his or her income in that tax filing, if you find yourself going through a divorce in the future. However, even with an indemnification agreement in place you still will be liable to the taxing authorities if you sign a joint tax return.
Death and taxes are inevitable but ignorance in this area is definitely not bliss. Financial honesty and transparency between spouses enables parties to have realistic expectations of one another and of their family’s future.