Congratulations Same Sex Married couples; The IRS – Post DOMA – Ruling is effective 9-16-13

 

This recent IRS ruling could have a major impact upon your finances. Don’t be caught short by an unexpected surprise.

This recent IRS ruling could have a major impact upon your finances. Don’t be caught short by an unexpected surprise.

Effective Monday September 16, 2013 all Same Sex Married (SSM) couples can file their Federal tax return as either Married Filing Separate or Married Filing Joint.  Filing as single is no longer an option.

The change was announced in an 8/29/13 IRS Press Release:

  • All Same-Sex Married (SSM) couples must file as married even if they are living in a state that does not recognize their marriage
  • Couples can evaluate returns filed in 2010, 2011, and 2012 to see if amending their return results in an overpayment and money back to you
  • Amending returns is an option and is not required

From a tax standpoint, SSM couples have incurred a lot of financial change since the DOMA ruling.

The 2012 Federal Tax filing season is almost over and SSM couples were granted the right to file their Federal return as married on 8/29/13. How will this change affect you? Is there “money in the IRS Treasury bank” or do you need to put money in the bank to pay tax obligations that you just incurred?

To help you get started evaluating how all this change could affect you, create a chart similar to the following for each of the tax years that could be amended to see if filing an amended return for Married Filing Joint (MFJ) saves you money as a couple.

Specific rules are available for each year on the IRS website. It is important to pay attention to credits, deductions, and related phase out amounts. For example, for 2012

  • The $2,500 maximum deduction for interest paid on student loans begins to phase out for married taxpayers filing a joint return at $125,000 and phases out completely at $155,000

The following chart shows TP#1 using the Standard Deduction and TP#2 using the Itemized Deduction. Hypothetical dollar amounts are not included because they would not be relevant to you.

2012 –Filed:

Prior to DOMA

Taxpayer #1 Taxpayer #2 MFJ Amended after 9-16-13
Adjusted Gross Income
Standard Deduction $5950. $0.00
Itemized Deduction 0 ?
Personal Exemption $3800 $3800.
Taxable Income
Tax Due


To see what the 2013 tax year looks like for Married Filing Joint:

  • List your combined income and Federal Tax withheld or paid to date
  • Determine if you are going to use the Standard or Itemized Deduction
  • Use the IRS Withholding Calculator to check your withholding amount
  • File a new W-4 to adjust your holding if needed

The American Taxpayer Relief Act of 2012 includes the following rules for 2013:

  • A new tax rate of 39.6% for individuals over $400,000 and $450,000 for Married Filing Joint
  • The Personal Exemption is $3900; this is phased out beginning with incomes of $250,000 and $300,000 for Married Fling Joint
  • Itemized Deductions are limited for Individuals over $250,000 and $300,000 for Married Fling Joint
  • The Alternative Minimum Tax Exemption is $51,900 ($80,000 for Married Fling Joint).

In closing, I understand that this is a lot of information to absorb, research, and evaluate to determine your financial situation.  Do-It –Yourselfers could be ready to go while others prefer to get help and spend their free time doing something enjoyable. Understandable. For now, just know that the IRS ruling could have a major impact upon your finances. Don’t be caught short by an unexpected surprise.

Benjamin Franklin said, “An investment in knowledge pays the best interest”.  May your investment produce a positive return for both your time and for your money.

How much do you keep of what you earn? 2013 Tax Plan

Have you noticed “The IRS” spells “Theirs”?  Paying tax is required.  How much you pay is determined, in part, by how you plan.

If you are married, or plan to be, for the 2013 Federal tax year, now is the time to look at your potential tax liability and determine your financial plan. Nobody wants to find out at the end of year that they owe taxes when there is little time to do anything about it.

The U.S. uses a graduated tax rate, which means that the tax rate increases as the income goes up.

There are five filing statuses:

  • Single (S)
  • Married Filing Joint (MFJ)
  • Married Filing Separate (MFS)
  • Head of Household (HOH)
  • Qualifying Widow (er) with Dependent Child (Q/W)

More than one filing status can apply to you. You can choose the one that gives you the lowest combined tax.

Generally, Married Filing Joint will result in the lowest amount of tax. There are exceptions and good tax planning involves reviewing “what if” scenarios.

Are you “withholding” enough to cover the estimated tax liability by the end of the year? If not, you need to either increase your withholding or use other methods, such as deferring income, to decrease the estimated amount owed.

The following will help you get started:

Filing Single is the easiest. All you need to decide is if you are going to save more money by using the Standard Deduction or to itemize deductions.

Married Filing Joint (MFJ) can be used if:

You are married on the last day of the year

Both you and your spouse report all your income, exemptions, deductions, and payments

Both spouses must sign the tax return because both of you may be held responsible for accurate reporting and tax payment

Married Filing Separate

Report your income, exemptions, credits, and deductions

Different rules apply if you live in a community property state. See Publication 555

You will “generally” pay more combined tax on Married Filing Separate returns than you would on Married Filing Joint returns for the reasons listed under “Special Rules” in IRS Publication 501

Some of the “Special Rules” include:

If your spouse itemizes deductions, generally, you cannot take the standard deduction

You cannot take the student loan interest deduction, the tuition and fees deduction, the education credits, or the earned income credit.

There are reasons why you might want to choose the Married Filing Separate (MFS) status:

  • You only want to be responsible for the accuracy and the payment of your tax liability
  • If your Adjusted Gross Income  (AGI) is lower by filing MFS than MFJ you may be able to deduct a larger amount for certain deductions that are limited by AGI such as medical expenses. For the 2012 tax year, you can deduct only the part of your medical and dental expenses that exceeds 7.5% of your Adjusted Gross Income. This increased to 10% for 2013.
  • Head of Household is for unmarried, or are considered unmarried, you provide a home for certain persons, and you meet the criteria by passing one of two tests. Detailed information can be found at IRS.Gov.

Tax rules are complicated and this is by no means comprehensive. Hopefully, it is enough to encourage you to look at your tax situation and to take action so you are not surprised with a big tax bill next year. A large return because of overpayment equates to giving the IRS an “interest free loan”.

Suggestions:

Use the 2012 tax rules to estimate your 2013 income and the amount of federal tax withheld

If it appears that you will either owe or have a possible large refund, consider filing a new W-4, the Employee withholding Allowance Certificate, with your employer

Reasons to change the amount withheld may include a change in your marital status or your dependents. Perhaps, you bought a house this year and know you will have enough deductions to itemize rather than use the standard deduction. Maybe, because of multiple jobs, too much is being withheld from your checks.

You work hard for your money. Don’t you want to keep as much as you can? After all, it is yours, not all theirs.