When you get married, the way you file your tax return changes. This can have a substantial effect on your final tax outcome. Whether you file together or separately, understanding the impact of marriage on your tax return can help you make the right choices and avoid unexpected surprises.
This article covers the key tax-related impacts of filing taxes as a married couple. For a detailed guide, please see page on tax filing statuses.
Filing Status And Its Effect On Taxes
One of the most significant ways marriage impacts your taxes is through the filing status. When you’re married, you have the option to file jointly or separately, and each choice can affect your tax situation differently.
Married Filing Jointly
Filing jointly often results in a more favourable tax situation for many married couples. The combined income of both spouses is reported on one tax return, and this can lower your overall tax liability.
- Lower Tax Rates: The income thresholds for tax brackets for married couples filing jointly are generally higher than those for single filers. This means your combined income may place you in a lower tax bracket compared to when you file separately.
- Higher Standard Deduction: Married couples filing jointly are eligible for a larger standard deduction, which reduces the taxable income. This can lead to a lower overall tax bill.
- Eligibility for Credits and Deductions: Filing jointly can make you eligible for various tax credits, including the Child Tax Credit, education-related tax credits, and more. These credits can directly reduce the amount of tax you owe.
- Ease of Filing: Joint filing simplifies the process, as you only need to submit one tax return instead of two.
Married Filing Separately
While many couples choose to file jointly, there are cases where filing separately can be beneficial. However, this often leads to higher taxes, and you may miss out on valuable credits and deductions.
- Loss of Credits: When you file separately, you may lose eligibility for tax credits like the Earned Income Tax Credit, Child Tax Credit, and education-related tax credits.
- Higher Tax Rates: Married couples filing separately often face higher tax rates on their income. This can make it more difficult to reduce your taxable income or lower your tax bill.
- Limited Deductions: Certain deductions are reduced or unavailable when filing separately. For example, student loan interest deductions and the adoption credit are not available if you file separately.
- Special Circumstances: In rare cases, filing separately might be beneficial, such as when one spouse has significant medical expenses or other deductions that could push them into a more favourable tax bracket when filed separately.
Marriage Penalty And Marriage Bonus
The tax system in Australia has a progressive tax rate structure. However, marriage can impact whether you experience a “marriage penalty” or a “marriage bonus.”
Marriage Penalty
A marriage penalty occurs when a married couple’s combined income pushes them into a higher tax bracket, causing them to pay more taxes than they would if they were filing individually. This is more likely to happen when both spouses earn similar or high incomes.
- Income Thresholds: The tax brackets for married couples filing jointly are not always double that of single taxpayers, meaning couples with similar incomes might face higher tax rates.
- Higher Combined Tax Burden: In some cases, the marriage penalty causes married couples to pay more tax overall than if they were filing separately.
Marriage Bonus
On the other hand, some couples may experience a “marriage bonus,” where their combined income results in a lower tax rate, leading to a tax reduction. This often happens when one spouse earns significantly more than the other.
- Lower Combined Tax Rate: The lower-earning spouse can balance out the higher-earning spouse’s income, resulting in a lower overall tax rate.
- Eligibility for More Benefits: The marriage bonus allows the couple to take advantage of more tax credits and deductions, such as those related to children, that could reduce the amount of tax they owe.
Deductions And Credits Available For Married Couples
Marriage affects not only your filing status but also the deductions and credits you can claim. Some tax credits and deductions are more advantageous for married couples, particularly if they file jointly.
Standard Deduction
For married couples filing jointly, the standard deduction is generally higher than for single filers. This helps reduce your taxable income and the amount of tax you owe.
- Increased Deduction: The higher standard deduction for married couples filing jointly lowers the overall taxable income, leading to a reduced tax burden.
- Filing Separately: If you choose to file separately, the standard deduction is often smaller, which can result in higher taxes.
Tax Credits
Marriage allows you to access a wider range of tax credits that can directly reduce your tax liability.
- Child Tax Credit: If you and your spouse have children, you may qualify for the Child Tax Credit, which can significantly lower your taxes.
- Earned Income Tax Credit: Although this credit is typically reserved for low-income families, married couples may qualify for it if their combined income is low enough.
- Education Credits: Married couples may qualify for education-related tax credits if they or their children are attending college or pursuing other higher education.
Other Deductions
Certain deductions are available to married couples, particularly when filing jointly. These deductions can help reduce taxable income and lower your overall tax burden.
- Superannuation Contributions: Married couples can make superannuation contributions to each other’s retirement funds. This can reduce taxable income and help save for retirement.
- Health Deductions: Medical expenses can be deducted, especially when one spouse has high medical bills that exceed the deductible threshold for income taxes.
Impact On Medicare Levy
The Medicare Levy is another tax that married couples need to consider when filing jointly. This levy helps fund Australia’s healthcare system, and the amount you owe depends on your income.
Medicare Levy And Filing Jointly
When you file jointly, the combined income of both spouses will be considered for the Medicare Levy calculation. This means if one spouse earns significantly more than the other, the higher-earning spouse may contribute more to the levy.
- Combined Income: The higher your combined income, the more you may owe for the Medicare Levy. However, if your household income is lower, you may be eligible for a reduced levy or exemption.
- Eligibility for Exemption: In some cases, couples with low income or special circumstances may be eligible for an exemption or reduction in the Medicare Levy.
Medicare Levy And Filing Separately
Filing separately also affects how the Medicare Levy is calculated. In this case, each spouse’s income is considered separately, and the tax burden may be reduced if one spouse has low or no income.
- Individual Levies: Filing separately means that each spouse pays a levy based on their own income, which could reduce the total amount the couple owes in the Medicare Levy.
Superannuation And Marriage
Marriage impacts how superannuation contributions are made and how they’re taxed. Superannuation is a vital part of retirement planning in Australia, and your choice of filing status can affect your superannuation strategy.
Spouse Contributions
Married couples have the option to contribute to each other’s superannuation accounts, and there may be tax benefits for doing so.
- Tax Offset for Spouse Contributions: If one spouse is earning less than the other, you may be able to contribute to their superannuation and claim a tax offset. This reduces your taxable income while helping your spouse increase their superannuation balance.
- Superannuation Splitting: In the case of divorce, superannuation can be split between spouses. This affects how tax is calculated on the superannuation balances and must be handled carefully to avoid unnecessary tax penalties.
Divorce And Taxation Of Superannuation
In the event of divorce, superannuation is treated as a joint asset and may be divided as part of the settlement. The tax consequences of this division depend on the terms of the settlement.
- Tax Implications of Super Splitting: If superannuation is split, there may be tax implications for both parties. It’s essential to consult a tax advisor to ensure that the super splitting is done in a tax-efficient manner.
Common Mistakes Married Couples Make
Marriage and taxes can be complex, and many couples make mistakes when filing their taxes. Avoiding common mistakes can ensure that you don’t miss out on valuable credits, deductions, or refunds.
1. Not Updating Tax File Number (TFN)
When you get married, you should update your Tax File Number (TFN) to reflect your new status. This ensures that your tax details are correct, preventing issues with your return.
2. Choosing The Wrong Filing Status
It’s essential to choose the correct filing status for your situation. Some couples may benefit from filing jointly, while others may be better off filing separately. Be sure to calculate both options to determine which gives you the best outcome.
3. Overlooking Deductions
Married couples often overlook deductions that are available to them, such as superannuation contributions, health-related deductions, or spouse contributions. Be sure to review all available deductions before filing your return.
Conclusion
Filing taxes as a couple can have a significant impact on your tax return. By understanding how filing status, tax credits, deductions, and other factors affect your taxes, you can ensure that you’re optimising your tax situation.
Filing jointly often offers more benefits, but in some cases, filing separately may be a better option. Consulting with a tax professional can help ensure you make the best choice for your specific situation.
Frequently Asked Questions
How Does Marriage Affect My Tax Filing Status?
Marriage allows you to choose between filing jointly or separately. Filing jointly typically offers better tax benefits, such as lower tax rates and eligibility for more credits and deductions. Filing separately may be advantageous in specific situations, but it often leads to higher taxes.
Can Filing Jointly Reduce My Taxable Income?
Yes, filing jointly can reduce your taxable income due to the higher standard deduction and eligibility for various tax credits. This often leads to a lower overall tax bill compared to filing separately.
What Is The Marriage Penalty?
The marriage penalty occurs when a married couple’s combined income places them in a higher tax bracket than if they were filing individually. This can lead to paying more tax than you would as separate filers. However, couples with significantly different incomes may benefit from a marriage bonus.