Posts tagged as:

marriage-penalty

Ask the Taxgirl: Living Together

April 13, 2007 · 0 comments

Taxpayer asks:  My husband and I are married, lived apart most of 2006 but did reside together the last several weeks of 2006. My husband retired and had no income for 2006. I had only interest income – more than $3, based on that believe that because of "living together at the end of 2006".

Here are the questions. What does "living together" mean for this purpose? My husband and I lived apart almost all year (with a handful of exceptions) but did reside under the same roof the latter part of December 2006. Does the IRS get into the nature or quality of the relationship? (IRS agents under the beds?) Also, does the duration of the amount of time "lived together" matter – e.g. is two weeks enough, one day, etc?

Taxgirl says:  It doesn’t sound like, from the facts, that you need to file, which was the question in your subject line.

That said, married is married.  If you’re legally married, your choices are to file Married Filing Jointly (MFJ) or Married Filing Separately (MFS).  You can file as MFJ if you were (obviously) married as of the last day of the tax year whether or not you’re living together or if your spouse died during the tax year and you did not remarry.  For more info, see my prior post on the subject.

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Ask the Taxgirl: Nonresident Spouse

March 1, 2007 · 0 comments

Taxpayer asks: I just got married to my beautiful wife who happens to be Australian. I’m a graduate student in San Diego and she hasn’t come to live with me yet.  My wedding was on December 27th so I’m wondering if it is somehow illegal for me to file my taxes as unmarried.  She has never made a cent in the US and she isn’t my dependent (I might be hers pretty soon, being a grad student and all).  Are there any benefits for me to file as married? Thanks.

Taxgirl says: First of all, congrats on the wedding!

Second, I’m going to preface my comments by saying that my answer is limited to the tax consequences as they relate to the US and not to Australia. While I do field questions from around the world (bring ‘em on), my focus is really US tax law. And Lord knows, I don’t want to piss off the likes of Russell Crowe and his ilk by saying something misleading about Australian taxes… And don’t send me email about Crowe being from New Zealand, he might have been born there but he was raised in Australia, so there.

But back to the matter at hand: what to do when your spouse is not living in the US and you are.

First of all, some definitions:

Single. Seems easy enough. You can file as single if you were never legally married under the laws of the US (meaning, really, that same-sex couples who might be married abroad must still file as single in the US); you were legally separated or divorced according to the laws of your state (in states like Pennsylvania where there is no legal separation, this means your choices are only married or divorced) or you were widowed before the last tax year and did not remarry during the tax year.

Married Filing Jointly. Okay, this one is also pretty easy. While the marriage penalty used to affect your decision, there really isn’t one anymore so that most married couples will choose this option. You can file as MFJ if you were (obviously) married as of the last day of the tax year whether or not you’re living together or if your spouse died during the tax year and you did not remarry. Again, you must be legally married under the laws of the US (that doesn’t mean that you have to be married here, just that we have to recognize it) so same-sex marriages are not realized for purposes of MFJ.

Married Filing Separately. This is a less popular option nowadays following the changes to Code with respect to the marriage penalty. In fact, you are more likely to get a higher tax bill filing MFS because you lose some of the benefits granted to MFJ filers, including certain deductions and credits. The rules still for MFJ still apply – you just make the decision to file as MFS (for whatever reason).

Head of Household. Head of Household is a wildly misunderstood election. You can only file as HOH if you are unmarried (important!) and provide a home for a dependent. Keep reading, though, there are caveats. You must be single, divorced or otherwise unmarried at the end of the tax year and (1) you paid more than 50% to keep a home for the entire tax year for a parent who was a dependent OR (2) you paid more than 50% to keep a home for the entire tax year with your dependent (but check the rules for who qualifies as a dependent for divorced or separated parents, I’m not going to get into that).

All that said, you are considered unmarried for purposes of HOH even if you were not divorced or legally separated at the end of the tax year if all of the following apply:

  1. You lived apart from your spouse for the last 6 months of the tax year (don’t count temporary absences for business, medical care, school, or military service) AND
  2. You file a separate tax return from your spouse AND
  3. You paid over half the cost of keeping up your home for the tax year AND
  4. Your home was the main home of your child, stepchild, or foster child for more than half of the tax year AND
  5. You can or could claim (under the rules for children of divorced or separated parents) this child as your dependent.

Now that all of that is out of the way, let’s get back to your question: where do you fall in all of this? Generally, a husband and wife cannot file a joint return if either spouse is a nonresident alien at any time during the year. However, if at the end of the tax year, you are married and one spouse is a US citizen (you) or a resident alien and the other spouse is a nonresident alien (your wife in Australia), you can choose to treat the nonresident spouse as a US resident.

If you make this choice, it’s done: you’re both treated for income tax purposes as tax residents for the entire tax year. Neither of you can claim benefits under any tax treaty and you are both taxed on your worldwide income, which would include income received from sources in your wife’s work in Australia. This is not an irrevocable election: you can file MFJ this year and MFS in future years.

You actually make the election by attaching a statement, signed by both spouses, to your joint return for the first tax year for which the choice applies. It should contain the name, address and Tax ID number (or SS number, if she has one) of you and your spouse and a statement that you’re electing to be treated as US tax residents for the entire tax year.

So, the verrrry long answer to your question is that you can file as MFJ or MFS. You cannot file as single, you know, since you’re not.

I would run the numbers and see what comes out if you make the election. Off the cuff, I’d say that if you have very little income, it’s probably advantageous in the US for you to file as MFJ (if she were not working, it would be a no-brainer). But then, it really does matter what kind of income your wife makes and what your expenses/deductions are – clearly if Australian tax rates are lower and your spouse is making tons of money, you wouldn’t want to subject her to US tax if you didn’t have to. On this one, I really would consult with a tax professional, preferably a good accountant.

One more word of wisdom, which probably doesn’t so much apply to you as it does to others in similar situations, if there are any immigration consequences to your tax filing, make sure that you consult with your immigration attorney. As you may or may not know, marriage to a US citizen does not equal US citizenship in all cases so if there is an immigration concern, check before you file.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying
on any information given on this site, contact a tax professional to discuss your particular situation.

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It’s My Anniversary

October 31, 2006 · 0 comments

My real anniversary, that is, not a blog anniversary. I’ve been married for six years. And the notion of my anniversary got me to thinking. You know, about marriage and what drives people to marry and to divorce. It should come as no surprise to anyone in the modern world that finances are often cited as a reason to do both. Pretty un-romantic, I know. But it happens.

But what does any of this have to do with tax? A lot. The marriage “penalty” in the Tax Code has been called one of the most family un-friendly phases of our entire legislative history – and that’s saying a lot. Many couples in the 1990s claimed that the “marriage penalty” was so significant that it was a reason not to get married at all. The tax tail wagging the dog? Perhaps. Tax policy, however, has always been a driving force behind the Tax Code. And our changing demographics influence how the Code has been changed over the years (and arguably, vice versa).

In the pre-World War II United States, the vision of the perfect family was a married couple with 2.5 children, a station wagon and a dog. Generally, these families were single income families in which the head of household, usually the father, worked and supported the family. With the advent of World War II and “Rosie the Riveter”, that began to change slightly. More and more women began going off to work and earning a second income while their husbands were at war. This posed problems for the Internal Revenue Service. Since 1913, one income had usually equaled one tax return. There were rarely other considerations.

However, with the advent of an increasing number of two-income families, a better approach was needed. So, in 1948, Congress adopted the joint tax return. The idea was that tax for a married couple would be paid equal to twice the income of a single filer. Income and deductions would be filed in the aggregate.

In the 1960s, the United States was changing again. More single women were earning college degrees and going to work. Married women still largely stayed at home. As more and more single women entered the workplace, single filers began objecting to what was ironically referred to as the “singles penalty”. The singles penalty was based on the notion that a married couple received the equivalent of two single-person deductions regardless of whether there were two incomes. This was unfair, claimed the singles, because married couples split expenses and thus did not deserve two full deductions and exemptions. In fact, the singles claimed that the tax system was, in effect, subsidizing marriage.

In 1969, Congress, responding to this charge, enacted an amended tax structure, which provided for a joint return for married persons with a scaled-down deduction equal to less than two single filers. This system, with some minor concessions in 1986 to higher income joint filers, remained in place for more than thirty years.

In the late 1980s and 1990s, the family structure in the United States changed yet again. More and more couples were choosing to live together rather than get married; like the yuppies of the early 1980s, these couples were given a nickname, “DINKs” (Double Income No Kids). A number of reasons were given for this phenomenon. One reason was the so-called “marriage penalty” which would give single filers who live together tax advantages not available to married filers. This happened because, as individual income levels rose, so did the income tax brackets of single filers. However, single filers retained the full personal exemption and standard deduction, unlike married filers. Additionally, the impact of the “phase out” which limits or eliminates many deductions and credits at certain AGI (adjusted gross income) levels is more dramatic for high-income married filers than for high-income single filers; married couples lost itemized deductions and personal exemptions more quickly. Capital losses and passive activity loss deductions were less favorable for a married couple than for two single persons – in some instances, a married couple’s total loss deductions was equal to a single person’s loss.

The phenomenon even inspired some niche industries (this is, after all, the United States). Since your federal filing status was dependent on your marital status at the end of the year, some cruise lines partnered with tax gurus to promote an end of the year “divorce special.” The scheme worked like this: at the end of December, a married couple would take a relaxing cruise to somewhere warm and fun. At the end of the year, they would get a divorce and, for federal tax purposes, would be considered divorced. On the return trip, the couple would remarry at sea. Voila. Tax benefits and a vacation to boot! You can imagine that this did not sit well with the IRS and the practice was subsequently sacked. But the existence of the practice emphasized the ridiculousness of the rule – and why changes needed to be made.

In 2001, perhaps as a result of a politically-charged campaign over what constitutes family values, a bill was signed into office purporting to offer relief for the “marriage penalty”. The tax law gradually increased the standard deduction for married taxpayers who file jointly to an amount equal to twice the standard deduction of persons filing a single return, resembling the 1948 bill that allowed two full deductions for married couples regardless of the level of income. This increase was phased in over five years beginning in 2005.

The bill was controversial. One reason for opposition is that the bill will prove to be a mere temporary fix and will result in the same debate that led to the 1969 amendments. Another, more qualitative argument is the cost of the bill: in 2006 alone, the bill is estimated to cost the government more than $35 million in lost revenue. The bill has a sunset provision which means that it is set to expire – a number of bills have been introduced to make the bill permanent. Most are still pending in Congress.

If you just can’t enough of this stuff, a detailed if somewhat outdated analysis and history of the so-called ‘marriage penalty,” the Congressional Budget Office prepared a report on the subject in 1997.

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