Tax implications usually aren’t on the minds of people who are getting married. Nevertheless, understanding how marriage can affect your taxes is an important part of planning your life together. These are some of the ideas worth keeping in mind for California residents who get married in 2021.
Community property and federal taxes
California is a community property state. That means that under ordinary circumstances, each spouse owns exactly half of all of the property acquired by a couple while they are married and living in California. This is true for most types of property, including income from work or a business. Even if one partner does not work while the other one earns a big paycheck, community property dictates that the individual who is not working has ownership of one half of the household’s total income.
State law carves out certain categories of property as separate property, which remains solely with one individual within a marriage. Several kinds of property can be treated as separate from the community pool, including these:
- Property acquired by either spouse before marriage.
- Income generated by separate property, like royalties on a book written before marriage or rental income from real estate purchased prior to marriage.
- Any property that both spouses have agreed in writing, including in a prenuptial agreement, to treat as separate property.
- Earnings in circumstances that meet the formal requirements of a separation, even if the marriage has not been dissolved.
California’s community property rules have implications for federal tax purposes. Federal tax law makes an individual responsible for paying taxes on all income in which an individual has a property interest. Likewise, deductions that arise from community activities (such as running a pass-through business) are available to both spouses.
Filing taxes jointly versus filing separately in California
Federal law offers two basic paths to married couples when they file their personal income taxes: married filing jointly, or separate returns.
Filing jointly is the most common approach, especially in a community property state. A joint filing is simpler, in large part because all of the couple’s income and deductions can be pooled together and documented on a single return. Filing jointly is also necessary for taxpayers who wish to qualify for certain deductions, such as the child tax credit, and in many cases will result in a lower overall tax bill for the household due to potentially higher tax rates paid by each partner separately.
Married taxpayers who file separately typically do so for relatively rare, specific reasons. Living in a community property state means that both spouses typically must report their one-half share of the household income on their returns, even though they are filing separately. Certain circumstances can still make filing separately the better option. Here are a few of them:
- High medical expenses. A taxpayer’s adjusted gross income, or AGI, is used to determine if he or she can deduct out-of-pocket medical expenses. For 2021, such expenses must exceed 10% of the taxpayer’s AGI before they can be deducted. For situations where one spouse has high medical costs while the other is earning a high wage, filing separately may help them qualify for a deduction.
- High miscellaneous deductions. The tax code is full of oddball deductions that can add up for certain individuals. For example, a job seeker is allowed to deduct the expenses of the job search, which can include travel and hotel costs for out-of-town interviews. Such expenses must exceed 2% of AGI to be deductible.
- Tax bracket strategies. In some cases, a married couple may find that by filing separately they can stay within lower tax brackets than would be the case if they filed jointly.
- The marriage is in trouble. Couples who are in the process of separation or who have financial disagreements may opt to file separately to keep their tax lives disentangled. We hope this is not the case for people who have only just gotten married in 2021, but it can happen.
Ferguson Timar can answer your tax questions
If you are planning to get married in 2021, or you recently got married, congratulations! When the time is right, Ferguson Timar is here to help you evaluate your new tax circumstances to determine the best course for your new family. We especially encourage newlyweds with complex property situations, like income-earning assets that were brought into the marriage, to get an early start.
To make an appointment with one of our tax experts, call us today at (714) 204-0100 or reach out through our contact page.