Please Note: This article is assuming a first marriage relatively early in life between two US citizens. Second marriages, blended families, a US citizen marrying a non-US citizen, and marriages later in life have additional complexities and nuances that are beyond the scope of this article. Just be aware that, in each of those cases, unique planning is necessary and we are here to help.
Arguably the most important, significant, impactful and longest-lasting decision you might make in life.
There are books, seminars, conferences, workshops, spiritual advisors, opinionated friends and family out there, all with plenty of information and advice to share with you on marriage and finances. You can’t turn around without falling over more information.
So we’re keeping this article short and sweet, and sticking to some of the main bullet points on marriage as it relates to your finances, taxes, and estate planning. Really, this is almost a checklist of topics to make sure you think about and reflect on with your partner.
Let’s start with taxes.
I won’t get into the weeds on taxes; I’m sure your eyes would glaze over and you’d click on to something more interesting before I got very far. We’re not getting bogged down, complicated and long here.
Instead, we’re keeping it just short enough to give you practical and useful information to justify the time you spend reading it.
When should I get married?
Honestly, we seldom get this question, but I have been asked this before.
What difference does it make when you get married?
Well, you may have heard of the “marriage penalty,” as it relates to taxes. This is a situation where you wind up paying MORE in taxes because you’re married than you would if you remain single.
Why this occurs is an interplay of the tax brackets, between the brackets for single people and the brackets for married people. A detailed explanation of this would put you to sleep; it’s purely a function of math.
Let’s say you are planning on getting married on December 31, combining your marriage with a New Year’s Eve event—but then you discover that getting married on that day would cost you several thousand dollars in taxes for that year. Would you wait one day?
Most likely not!
On the other hand, the “marriage penalty” (or “marriage bonus,” as it’s called if it swings the other way) can work out to a substantial amount of taxes owed, and that could become a reasonable factor to consider in conjunction with your wedding plans.
Of course, this assumes that you and your spouse-to-be are actually having conversations about finances and taxes at that level before the marriage—and hopefully you are, if marriage is on the table. Just know that tax changes due to when you get married are something that can be planned for.
How should I file my tax return?
Rule Number 1: Your marital status is determined on the last day of the year.
That’s one of the simple rules.
If you are married on December 31, then you are considered married for the entire preceding year. Once you are considered married under the tax law, the law tells you how you MUST file your tax return. You may either file
- “married filing jointly,” or
- “married filing separately.”
This is deceptively simple; there are just two choices. How hard can the decision be?
Well, the variables to consider before choosing include items such as:
- tax brackets,
- Net Investment Income Tax,
- capital loss carryforwards,
- passive loss carryforwards, and
- what state you live in.
There is no accurate way to answer the question about filing status without doing a detailed tax projection that takes into account all the variables and how they interact under both scenarios.
Without doing a projection, only a very generalized statement can be made:
Generally speaking, there is a better tax result from filing jointly rather than separately.
However, this should always be stated with a huge caveat: the fact that the statement is generalized means you should not assume that it can apply to your specific situation.
If you determined that filing separately was the best choice in the first year of your marriage, that does not require you to file separately in another year. You may decide on a year-by-year basis which filing status is best for you.
How much tax should I have withheld?
This may be the most common question we hear from newlywed clients: Should I change how much tax is taken out of my pay?
The answer is probably: “Yes!”
Just as with your selection of filing status, there are so many factors in play that it is almost impossible to give a one-size-fits-all answer to this question.
Your employer had you will out a Form W-4 when you started working for them; this is how your employer determines how much federal and state income tax to withhold from each of your paychecks.
Of course, that W-4 form is notoriously inaccurate if there are any complexities at all involved, or if there is a big tax law change! (As we saw recently with the Tax Cuts and Jobs Act of 2017.)
In the 2019 filing season, when we filed 2018 tax returns, millions of taxpayers were shocked and dismayed to find that they owed tax on April 15—many were totally caught by surprise. It was not because they owed more tax overall; rather, it was because the withholding tables that the IRS requires employers to use were simply not accurate.
The only way to really know for certain that you are having enough tax withheld from each of your paychecks is to do a tax projection taking into account a full picture of your financial situation during the year.
At the very least, you should each fill out a new Form W-4 at your work and, once it goes into effect, compare your take-home to what you were previously receiving.
Getting married changes everything. Including taxes.
Before you were married, you may have been a do-it-yourself kind of person when it comes to taxes, but the complexities of choosing a filing status and deciding how much to have withheld from your pay might make this an opportune time to include a tax professional in your life.
Now for some non-tax things to think about—although, the truth is, taxes are impacted by almost every topic we can talk about.
Before getting married, you most likely never thought about your state’s property laws or even knew there are property laws.
(We’re in Texas and most of our clients are in Texas, so we’ll be addressing our state’s property laws in this piece.)
Texas is one of nine “community property states.” The other 41 states are basically “separate property states.” The implications of this are hard to overemphasize. Both in life and in death.
Delving too far into the details gets far too complicated too fast, and we promised to keep this article short and sweet, so here is a very simplified explanation:
In a community property state, everything acquired during the marriage is community property; it belongs equally to each spouse.
This property includes wages and salaries, investment income, sole proprietorship income, bank accounts, investment accounts, real estate, collectibles, automobiles… everything that is property and income.
Example: If you determined that filing separately is the best way to go for your financial situation, in a community property state, you are required by law to include only one half of your earnings on your tax return and you must include one half of the earnings of your spouse. Also, one half of the tax withheld from your paycheck is reported on your tax return and one half of the withholding from your spouse’s paycheck is included on your tax return. Every item of income and expense is split like this.
This sounds so surreal that clients through the years have simply found it impossible to believe.
Because of this complexity and how the math works, it’s very rare in a community property state that filing separately results in a favorable tax situation—except in, possibly, the first year of a marriage when the income that was earned prior to the date of marriage is not community property.
(The implications of the community property rules can be extremely beneficial upon death of one of the spouses, but sometimes quite onerous in the case of divorce. Both will be explored in articles coming later in our series.)
Are you going to have joint bank accounts, separate bank accounts, or both?
There’s nothing good/bad or right/wrong about either choice. You simply need to understand the implications of each so that you can make the best choice for your situation. Let’s go through a few overall rules below:
If you hold bank accounts jointly, there is generally a seamless passing of the bank account to the surviving spouse in the event of the death of one spouse.
In a community property state, bank accounts (whether held jointly or separately) are community property if they have any community earnings deposited into them after the date of marriage.
If you hold bank accounts separately and you want a spouse to have access to the account in the event of your incapacity or death, then how the account is legally held is going to be very important. [Can we expand this a bit more? For example, whether this means that they should have a POA for their spouse and vice versa? -DB] Generally, in a community property state, a bank account jointly owned by spouses will be determined by courts to be an account with “right of survivorship”, in other words the survivor as full access to the account without it being mentioned in the will or going through probate. If the account, on the other hand, were not a joint account, but held just by one spouse, then the intent for that account must be made known in the will. Often we’ll see that an account is held by one spouse, but not the other, but there is a POA in place in case something happens. That’s OK unless the “thing that happens” is death, because a POA ends with death. This results in the court (and the bank if their following the rules) to go through probate. It will likely come to the spouse eventually, but how do you pay bills in the meantime if that’s where most of the income is. (I recently read a 27 page article by a professor at SMU about joint bank accounts in Texas, the history of the law behind them, and the unexpected pitfalls. All to say, it’s a complicated area, so I don’t want to write too much that might be taken as legal advice. The main thing is that every new couple should be thinking about this and talking to an estate planner who knows the law.)
If you’re going to have a joint account, then remember to close any old bank accounts and transfer their balances to the new joint account.
Finally, if you close old bank accounts, remember to cancel or move any auto drafts that were occurring from that account, whether they’re life insurance payments or your Netflix subscription. (Neither of which you want cancelled or interrupted!)
There’s no law that says you have to change your name when you get married; however, the overwhelming trend among our clients is that one spouse takes the other’s surname when they marry.
If you’re going to change your name, then you must inform the Social Security Administration; use Form SS-5. Can we make this a link to the Form on the SSA website?
Why? If you change your name, start using the new name, open accounts under the new name, and then try to use that name when filing a tax return—and the Form SS-5 has not been filed, then the tax return will be rejected.
This is not a process that can be done online, so you will need to print out the form along with the instructions (specifying what you need to provide to the SSA), fill out the form, gather the required documents to prove who you are, and submit the packet to the SSA.
If you’re going to move after you’re married, then you should let the IRS know. You can do that by filing Form 8822.
You are not required to file this form—you may simply enter your new address on the next tax return you file and the IRS will update their records accordingly.
However, if the IRS tries to communicate with you before the next tax deadline—and they only communicate by US mail—they will not know where to find you. Since correspondence from the IRS is not allowed to be forwarded, this can lead to problems.
We have seen a few clients get into a serious bind over the years by moving and not informing the IRS right away: the IRS sent notice of a proposed change to the tax return, the taxpayer did not receive it, and so they did not respond. The result was the IRS assuming they’d been ignored and taking more drastic actions. [Do you want to provide a quick example? -DB] The drastic action would be escalating the proposed change that the taxpayer could simply have disputed or answered to a change that would now require the taxpayer, if they disagreed, to file a protest in tax court, which is almost always extremely expensive due to legal fees incurred.
If you move more than a couple of months before your next tax return is due, it’s best to go ahead and let the IRS know.
Have you discussed financial goals with your partner? Hopefully you have! If not, don’t put it off.
Financial goals are the backbone of a financial plan. They are the milestones along a financial roadmap, and you want to be sure that you and your future spouse are headed in the same direction.
If your plan is anything other than “ let’s hope for the best,” then goals need to be established.
The goals you establish—or even if you just establish the way you approach spending and planning—are essential elements of a financial plan.
We know: that’s just hardly ever “fun.” However, having a budget that you and your partner are committed to can lead to fun (like achieving financial goals such as owning your own house, or finding the funds for an amazing vacation).
Also, something I’ve found surprising in quite a few married clients is that, between spouses, one of them actually does find the budgeting process enjoyable!
When establishing a budget and financial plan, you might say, “Of course, we want to save, enjoy life, and have a good retirement.” That sounds great, honestly, but that’s not a plan. It’s not even a well-imagined wish.
Planning begins with goals; you have to be headed someplace. You don’t need to know all of your mutual goals on Day 1 of marriage, but you do need something to begin with. Often times, the first goal is to purchase a home.
OK! That’s a starting point.
If you’d like you purchase a home, you will need a down payment and to understand how much you can afford to pay for the house.
Then you might say, “We want more people to live in that house. We want kids!”
There’s another goal!
Some goals are going to force themselves into the picture. For instance, if you’re planning to have kids, then you’re likely going to be involved in their education. Once you figure out to what degree you’ll help them with education (will you help through college?), you have another goal there in front of you.
So, you start to see a path… a journey shaping up.
To make any of that real, you need to save.
To save, you need to know how much you can and are willing to save.
The answers to these questions are born from your income and budget! (If you don’t like the b-word, a more palatable term may be “Spending Plan.”)
There are numerous ways to come up with a spending plan and several apps and websites that you can use to help its development, from Quicken to Mint to You Need A Budget.
You need some basic information to get started:
- How much do we take home?
- How much do we spend?
- How much can we save?
- How much do we need?
This information may be basic, but it’s essential and should be something you and your spouse collaborate on early in marriage. Using an online program or app like Quicken, this whole process can take just a few minutes each month.
Review your employee benefits.
Maybe both of you cannot afford to make the maximum contribution to your employer’s 401k plan. That’s okay. Now that you’re married, you’re in this together, so think in those terms.
Get to know the details of the available 401K plans offered by each of your employers. What if one employer simply has a better plan, better matching, more investments available?
Then your plan might be: One spouse will contribute more of their earnings to their employer’s plan and the other spouse will put less or none into theirs. Together, you’ve focused on the plan that brings the most benefit to the marriage and to accomplishing your common goals. What you should both do at a bare minimum is contribute enough to each plan so that you have fully earned any employer match.
You should review the health benefits that each of your employers offer so that you’re both sure you’re choosing the plan(s) with the best coverage for the two of you.
Maybe one employer has an HSA available and the other doesn’t. You’ll also want to understand the deductibles, out-of-pocket costs, and wellness provisions that are offered by each employer’s plans.
When you’re on your own, you may not have given much thought to becoming disabled, but as part of a team, part of a marriage, this should be addressed carefully—especially where one partner may be providing more money to the family spending plan and accomplishment of your common goals.
Young people are statistically more liable to become disabled than to die early.
Find out if each of your employers offer disability insurance as a benefit. Oftentimes, you’ll be able to purchase disability insurance from your employer at more favorable prices then if you shopped the market and purchased directly.
I encourage every client of ours to strongly consider disability insurance.
Often, employers will provide life insurance to their employees through a group plan.
Carefully review the group plan so that you can understand whether you are covered and for how much.
Early in a marriage, you might need some life insurance, but this should be factored into a holistic, integrated financial plan—and not purchased because a college buddy is asking you to purchase a policy.
Insurance in General
When you get married, you will need to review your auto, homeowners, renters and umbrella insurance policies to make sure that every policy is still appropriate.
Something that we routinely suggest to our clients is to have an insurance professional as one of your trusted advisors—someone who can review all of your policies to determine if there are any gaps in coverage, overlaps in coverage, bad coverage, etc.
For instance, one spouse might already own a house and the other spouse moves in when they marry. If that spouse moves in with expensive jewelry or technology, you’ll want to make sure the existing homeowners policy is adjusted to reflect that.
Unfortunately, estate documents (along with a formal estate plan) is something that very often gets pushed to the back burner… indefinitely. We understand that it’s not fun to think about these things, but it’s necessary.
What are the basic estate documents?
- Medical Directive
- Durable Power of Attorney
These are the basic ones that everyone should have prepared and kept in a safe, central place, especially after you are married.
If you already have one or more of these, it is imperative that they are up to date.
These are documents, obviously, that have to do with really bad things happening. You do not make the bad thing happen by making sure these documents are in place. Don’t delay.
If the unspeakable happens, you want to make sure that the one left behind can do what they need to do and what you want them to do.
This is part of estate planning: make sure that your 401k accounts, IRAs, HSAs, Roth IRAs, and life insurance policies all have the correct beneficiary designation.
Very often, single folks will have a parent or sibling named beneficiary on these accounts. Assuming your intention is that your spouse is now the beneficiary, you must make the change to the designation or it will not happen. It doesn’t happen automatically.
This is how spouses can unintentionally be “disinherited” and, surprisingly, this is not uncommon. It is just the result of putting off a task that you plan to handle later, and later comes more quickly than you planned for.
Well, if you’re already married, then it’s too late for this—you’d have to look at a postnuptial agreement. (Yes, that’s a thing!)
Prenuptial agreements are not always about lack of trust and doubts about the future of the marriage—your marriage isn’t less worthy if you have one. Earlier in this article I mentioned community property states, Texas being one.
For unique estate planning purposes, two people who completely trust each other and whose intents are to be married for a lifetime may still have valid reasons for keeping assets “separate.” In a community property state, this may be possible via a very well-written prenuptial agreement.
Of course, this may require jumping through some hoops during the marriage, but it is possible and may be accomplished with a prenup. To do this, you must have an attorney very well-versed in community property laws and the laws of the particular state in which you reside, so this is not a DIY document you find on the internet. Talk to professionals to have it done correctly.
As I said at the beginning, there is an absolute mountain of information out there about marriage and finances. I’ve just touched the tip of the iceberg, but I hope this article has been helpful as a sort of checklist of topics to tackle early in your marriage.
As always, we believe in holistic, integrated financial planning, at every stage in life, and would love to support you in your journey! Give us a call at (214) 763-5167.
See the PDF version of this article here: https://drive.google.com/file/d/1OrrKP-uMBzdwhlwb054iMLL5eaZf4tCc/view?usp=sharing
From the desk of David Freeze, CPA/PFS.