Why this newest marriage tax penalty is now the worst ever

Love can hurt your finances. Stop and consider these 4 things before you tie the knot.

Entrepreneurs, you take considerable time and effort to get a business started. You may need to apply this same due diligence prior to your wedding date. Don't get me wrong-- I'm all for marriage-- but let's be smart about this lifetime commitment with its huge tax consequences.

You probably already know that some married couples will pay less in tax, especially if one spouse earns more than the other. But for two well-paid professionals, their combined incomes may put them in the highest tax brackets, also causing their tax bills to rise.

Crash course on common tax forms:

Guide to commonly-used US tax forms
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Guide to commonly-used US tax forms

The 1040 family of tax forms is for federal income tax and is absolutely essential for all.

The 1040EZ form is the simplest version and is typically filed by those who:

  • Have no dependents
  • Are younger than 65
  • Earned less than $100,000
  • Don’t plan to itemize deductions

Form 1040A is more comprehensive than 1040EZ, but simpler than the regular 1040. It's beneficial for those who earn less than $100,000 and don’t have self-employment income -- but who want to make adjustments to their taxable income, such as child tax credits or deductions for student-loan interest. Note that it doesn't allow for itemized deductions.

Form 1040 is filled out by those who make $100,000 or more, have self-employment income or plan to itemize deductions.

The W-2 is completed by employers document each employee's earnings for the calendar year. You will want to take a look at this tax form for important information you'll need to fill out your 1040, 1040A or 1040EZ. 
The 1098 form is filled out by those who:
  • paid interest on a mortgage
  • paid interest on a student loan 
  • paid college tuition
  • donated a motor vehicle to charity

The 1099 series is reports all income that isn’t salary, wages or tips, and must be reported on both the state and federal level.

1099-DIV reports dividends, distributions, capital gains and federal income tax withheld from investment accounts, including mutual fund accounts.

1099-INT trakcs interest income earned on investments.

1099-OID (Original Issue Discount) is provided if you received more than the stated redemption price on maturing bonds.

1099-MISC documents self-employment earnings, as well as miscellaneous income such as royalties, commissions or rents. It covers all non-employee income that is not derived from investments.

If you receive a refund that you're unable to pay in full, you can request a monthly installment plan using Form 9465.
Don't forget to notify the IRS if you move! Use Form 8822 to change your address with the Internal Revenue Service. Otherwise, notices, refunds paid with a paper check and other correspondence relating to your personal, gift and estate taxes will be sent to your former address.
Anyone who has been employed by a company has completed a Form W-9. The W-9 is used by employers for payroll purposes -- and the information on the W-9 is used to prepare employee paychecks during the year and W-2 forms at the end of the year. 
The W-4 is an IRS form completed for employers know how much money to withhold from your paycheck for federal taxes. Accurately completing your W-4 can both ensure you don't have a big balance due at tax time and also prevent you from overpaying your taxes.

Here are 4 other business matters to consider before you tie the knot.

1. Introducing the Marriage Tax Mortgage Penalty.

This year, the IRS has given couples one more reason not to get married. Unmarried couples can now deduct twice as much of their mortgage and home interest on their tax returns. This stems from a California case where Bruce Voss and Charles Sophy were registered as domestic partners and owned two properties together.

The tax code says taxpayers can deduct the interest on up to $1.1 million ($1 million for a mortgage and $100,000 for a home equity loan) in mortgage debt. Voss and Sophy each tried to deduct this full amount, but the IRS audited their returns, saying the $1.1 million limit had to be applied on a per-residence basis. In other words, they had to share the deduction limit. The men sued, lost, then appealed to the U.S. Court of Appeals for the Ninth Circuit, which overturned the ruling in August, and found that the men should each get their own $1.1 million deduction limit.

This summer, the IRS "acquiesced" in that ruling, which means it applies to everyone in a similar situation. The bottom line is if you stay unmarried, you can deduct the interest up to $2.2 million, as opposed to married couples who are still limited to $1.1 million.

This probably won't be a marriage deal-breaker for you, but it's smart to run the numbers by a tax professional.

2. Your Wedding Date Matters. Just as you (hopefully) plan your business matters for the most tax advantageous results, have you thought about setting your actual wedding date this way?

Whatever your status is on December 31-- married or single -- that's how the IRS treats you for the entire year. I had a friend who got married on December 27. Had he consulted me, I would have told him to wait until after January 1 of the next year because that one week cost him more than $7,000 in additional taxes. That was his particular case under the tax code then. Your marital status may or may not help you, which is why you should also add "tax advisor" to your guest list.

3. Decide on a Prenuptial Agreement. No one starts a business thinking it will end in failure. Likewise, no one wants to approach marriage planning for a divorce. But as an entrepreneur, you may want to protect a family business or pass a business to children from a prior marriage.

Even if there is a pre-nuptial agreement in place, there are cases being challenged for various reasons, including one spouse signing and later claiming he or she didn't receive adequate legal counsel. A spouse may claim she was rushed into signing or had inadequate disclosure of circumstances and assets. You could also find yourself in the case where financial circumstances have changed so much that the pre-nuptial agreement doesn't fit your circumstances at the time of divorce.

Entrepreneurs, really, I'm not trying to kill the romance, but make sure you have both legal counsel and a tax professional weigh all of your options prior to the marriage.

4. Get a Business Valuation. Many times an entrepreneur's most valuable asset is the business. You would be smart to obtain a business valuation near the date of your marriage. If you own a business prior to marriage, your spouse may be limited to claiming half of the increase of the value. He or she may have contributed to that increase by hours, finances or even emotional support. A pre-marriage valuation could save you thousands or even millions of dollars.

Many couples don't even talk about their financial situations before the wedding day. I'm talking about basic things like, "Honey, what's your credit report look like?" If your soon-to-be spouse is deeply in debt, you will be too.

Take it from someone who has 47 years in the businesses of taxes, stop and think before you tie the knot.

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