Newlyweds face tax decisions

Norm Grill for Fairfield Citizen writes: Albert and Cyndi just got married. At the urging of both sets of parents, they met with their financial advisor to discuss the tax consequences of marriage. Albert is employed, and Cyndi is a recent college graduate looking for work.

Their advisor said they'll have many issues to consider over their lives together, and tax liability could play a critical role in their financial security -- or lack thereof.

Their advisor began by explaining that planning accordingly for the tax impact of being married is important for all newlyweds. Why? Because it changes things.

For example, because only Albert is working, the couple may be able to save tax dollars by filing jointly. What's more, because Cyndi does expect to be working next year, their advisor suggested they might benefit from accelerating some of Albert's income into 2013 and deferring deductible expenses to 2014.

However, once both are employed, they'll face a dilemma common to the matrimonial state: Because the middle and top tax brackets for married couples aren't twice as big as those for singles, Albert and Cyndi could wind up in a higher tax bracket than if they were able to file as singles. This is commonly known as the "marriage penalty."

"Didn't the latest tax law take care of that?" Cyndi asked. Their advisor clarified that the American Taxpayer Relief Act of 2012 did extend marriage penalty relief -- but only for the 10-percent and 15-percent brackets.

By the time they hit the 39.6-percent bracket, the couple will face a huge penalty. As singles, neither Albert nor Cyndi would be subject to the 39.6 percent rate until his or her own taxable income exceeded $400,000. But, as a married couple, they'll face that rate as soon as their combined taxable incomes hit $450,000 -- only $50,000 more.

Suppose, their advisor said, that the couple each earn $400,000. The tax that they'd pay as a married couple is more than twice the amount they'd pay if they were two unmarried people earning the same amount each. In this simplified example, Albert and Cyndi would face a tax bill more than $31,000 higher than that of their unmarried friends earning the same amount.

Because tax laws and personal circumstances change over time, it is a good idea to talk with your tax advisor at least once a year to make sure your tax liability is minimized.