People getting married generally do not spend as much time as they should to consider the tax issues. With a second marriage, tax issues are much more complex than they are with a first marriage. Usually there are families from prior marriages where the spouses need to be assured their assets will ultimately go to the right family members. Improper or precipitous actions can have inheritances from one spouse go to the beneficiaries of the other spouse. A prenuptial agreement is usually essential. Here are some tax considerations to be aware of:
- Whether joint or separate tax returns will be filed. When a married couple files separate returns, they file are at higher tax rates and certain maximum or minimum threshold amounts are limited than if they had filed jointly. Some important considerations in making the decision to file joint or separate tax returns…
- A spouse may not want to file jointly because of egregious deductions claimed by his/her spouse and he/she does not want exposure to potential disallowances by the IRS.
- If one spouse has high capital loss carryovers that were incurred prior to the marriage, the losses cannot be used to offset capital gains by the other spouse if a joint return is filed.
- If there is a tax lien on one of the spouses, filing a joint return can expose any refunds to seizure by the IRS. The IRS cannot otherwise seize separate assets of the second spouse.
- If a house is owned by one spouse and they file separately, the owner’s income may not be sufficient to maximize the benefit of the deductions for real estate taxes and mortgage interest.
Note that if spouses do file separate returns, it is possible to re-file amended returns as joint to claim tax overpayments. But if a joint return is filed, it is not possible to re-file as separate. Decide carefully!
- Whether you itemize deductions on your tax return. If one spouse itemizes, the other must even if he/she had no or minimal deductions to claim. This is so whether spouses file separate returns or a joint return.
- Whether gifts will be split for gift tax filing. If the gifts are not more than $28,000 per recipient, there is a benefit (and no harm) to splitting the gift. However, if the gifts exceed that amount the excess will be applied equally to each spouse’s lifetime exemption. If it is eventually determined that one of their estates would be subject to estate tax, then the earlier amounts applied to lifetime exemption would have the effect of increasing the estate tax by 40% of those amounts.
- Portability of unused estate tax exemptions. This is a “freebee” for the surviving spouse if the deceased spouse did not have to pay federal estate tax. Proper planning and cooperation can extend these amounts by using credit shelter trusts, but this planning must be carefully thought out when there are two separate families.
- Inheritance rights. This is not a tax issue, but still important for you to review. Spouses have inheritance rights to pension plans but not IRA accounts. Also, a spousal pension right to inheritances of pension plans (but not IRAs) can only be signed off on AFTER the marriage, not beforehand. But the spouse in a second marriage where there is a prenup must specifically renounce (give up her right to) the IRA or a portion of the IRA. The prenuptial agreement, which can cover many issues, cannot affect the pension plan sign off. A possibility is to roll over pension accounts to an IRA before the marriage and then include the renunciation of the right in the prenuptial agreement.
- Support for the surviving spouse. If a cash flow provision is to be made for the surviving spouse, consider a qualified terminable interest property (“QTIP”) trust. Amounts left in the QTIP trust will escape estate taxation until the surviving spouse passes away, and the income must be paid to them for the rest of their life.
These points provide a basis for further examination and discussion with your tax advisors and attorneys before the marriage. Spending a little time beforehand can potentially save a lot of time—and consternation and money—afterwards.