Friday, March 4, 2016

Getting Married? One Piece of Critical Tax Advice!

You know that W-4 that you filed?  The one you give your employer to decide how much taxes to withhold from your pay?  The one with a box for Married and a box for Single, and a box for Married, but withhold at higher single rate?  Ever wonder why there's a box for Married, but withhold at higher single rate?

Because when you get married, and don't have any kids or other tax unusualness (made up word of the day), then it is sometimes necessary to continue withholding at the Single rate.  Since this is an official government form, some people are very uncomfortable checking the Single box when they're actually Married.  It feels like lying to the government, and we see people go to jail for that. 

In this case, it's okay.  In fact, you can pretty much do whatever you want as far as entries on the form - as long as you don't owe the IRS more than $1000 when you file your taxes (states have similar rules with different thresholds.)  Just ask Boeing employees here in South Carolina.  They love to go Exempt just before bonus time so they get the whole bonus (that 25% plus state withholding kills the bonus).  If they do it right, no big deal.  Side note: they never do it right so STOP IT Boeing employees - you're going to be SCREWED come tax time!

So what does this have to do with getting married?  Well, the W-4 form is pretty much useless unless you're a single income family.  If you and your wife-to-be both have incomes, and no kids, your combined tax return will have pretty similar results to your individual returns from before getting married.  This is because the deductions double, and the tax rate thresholds double.  So if you like your results before getting married, don't change your W-4 to Married.  If you do change your status on the W-4, your paychecks will go up, but your tax return will go down, sometimes to the point you end up owing at the end of the year!  Leave it alone until you file that first married tax return and make adjustments based on those results.

By the way, if you get married before 12/31 of the tax year, you're married for tax purposes.

If your situation is more complicated, the W-4 situation is more complicated as well.  In this case, I suggest as a starting point that the highest income use Married and an exemption number of family size minus 1 (husband, wife and 2 kids would use 3).  All other income sources would be Single and 1 (zero if you have high incomes or want some extra safety margin.)  This is often overkill, but doing it wrong can get ugly fast.  After filing tax returns for the year you can start tweaking things to get your desired refund for the future.

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