Marriage, the birth of a child, divorce, retirement – these are just some of the events that bring important changes to a person’s life. These milestone events can also have a major impact on a client’s tax picture. With the summer wedding season in full swing, let’s look at the tax implications of one of life’s happiest milestones: a wedding.
When one spouse takes the other’s last name or, as is increasingly common, both spouses hyphenate their last names, any name changes should be reported to the Social Security Administration (SSA) as soon as possible. If one or both of the newlyweds file a tax return without updating their Social Security records, there will be processing delays if the IRS computers can’t match the new name with the Social Security number on the return.
A name change should be reported to the SSA before it is reflected on the client’s W-2, Wage and Tax Statement, for 2018. Simply reporting the change to the client’s employer is not enough – although, of course, that should be done as well. The SSA must be notified so it can update the client’s records and issue a new Social Security card. Otherwise, your client’s earnings may not be properly posted to his or her Social Security account.
To obtain a new Social Security card reflecting a name change, a client must complete Form SS-5, Application for a Social Security Card. Form SS-5 is available at any Social Security office or by calling 800-772-1213. The form can be completed and printed online. However, the form cannot be submitted online. It must be delivered or mailed – along with supporting documentation – to the client’s local Social Security office. For a name change, original documentation – for example, a marriage license – must be submitted that shows both the client’s old name and new name. The SSA will accept only original documents or documents certified by the issuing agency; photocopies or notarized documents are not acceptable. The SSA will return the submitted documents after processing.
If the newlywed couple is moving to a new home, each spouse should notify the IRS by filing Form 8822, Change of Address. The U.S. Postal Service should be notified so that it can forward any IRS correspondence or refunds that are issued before the change is recorded in the IRS systems.
Wage Withholding and Estimated Tax
Each newlywed spouse should also file a revised Form W-4, Employee’s Withholding Allowance Certificate, with their employers to reflect their new marital status. This should be done within 10 days of their change of status.
For example, if the spouses earn approximately the same incomes and they file jointly, their tax may be higher than their combined tax as unmarried individuals. This is the well-known “marriage penalty.” Unless the couple files new W-4s to increase withholding, they may be significantly underwithheld.
On the other hand, if one spouse earns most or all of the couple’s income, a joint return may produce a lower tax than two single returns. In other words, they will receive a “marriage bonus.” Therefore, unless the couple reduces their withholding, they will be overwithheld.
2018 TAX TIP: Suggest to your clients that they use the IRS withholding calculator instead of the worksheets in Form W-4 to calculate their withholding allowances. Because of the tax law changes made by the Tax Cuts and Jobs Act of 2017, the withholding calculator is likely to produce a more accurate result.
Clients who prepay their taxes through estimated tax payments should adjust those payments accordingly.
Couples who marry before the end of 2018 are considered married for the entire year for tax purposes. They can file their returns for the year as either married filing jointly or separately. Newlywed clients should be advised that they can no longer file as single taxpayers.
Because of the graduated tax rate system, if one spouse earns all or most of the income, joint filing can result in significant tax savings. On the other hand, if the spouses have roughly the same incomes, the couple should figure their tax using both the joint and separate filing status and use the one that produces the lower tax. Newlyweds should be cautioned, however, that if one spouse itemizes deductions on a separate return, the other spouse must do so as well; one spouse cannot itemized while the other claims the standard deduction.
Moreover, some tax benefits are available to joint filers but not to separate filers. For example, only joint filers can make contributions to an individual retirement account (IRA) set up for a non-working spouse. And only joint filers can claim the dependent care credit and the earned income credit. Most significantly for young newlyweds, the education credits, the deduction for student loan interest, and the tuition and fees deduction cannot be claimed on a separate return.
Whether you have clients getting married this summer or any other time of the year, you can be an important advisor during this critical juncture of their lives, providing them important information and advice related to their new tax status.
Editor’s note: This article was originally published on July 28, 2017, and republished on June 18, 2018, with updates.