The 6 Biggest Tax Mistakes Couples Make That Keep Them From Building True Wealth
How to get you and your other half the most money this tax season.
PixelsEffect | Canva As if relationships weren't complicated enough, we're forced to add math, paperwork, and the IRS into the mix this time of year. It almost makes us want to take our chances and hide from Uncle Sam on a tropical beach somewhere.
But before plotting your escape, give those taxes another go. Consider these six big tax mistakes that couples make that keep them from building true wealth — and learn how to avoid them:
The biggest tax mistakes couples make that keep them from building true wealth:
1. Waiting until the last minute to file
Single people make this mistake, too, but for married couples who have to coordinate their W-2s and deductions, the tendency can be even more pronounced.
After all, since you can blame your significant other for the delay, it's not your fault, right? The downside to waiting until April 14 to start filling out your paperwork is that you have less time to carefully review it and check for any deductions or tax credits you might have missed. Most importantly, you delay any potential refund.
"You don't even have to give the IRS a reason; you can get an extension just by asking for it," explains Barbara Weltman, an attorney and author of J.K. Lasser's 1001 Deductions and Tax Breaks 2011.
The one catch is that if you owe any money, you could be subject to a late payment penalty. So if you think you've underpaid your taxes throughout the year, try to finish up your paperwork on time.
2. Forgetting about the marriage penalty
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Newlyweds often find it shocking to discover that they owe the government more money after tying the knot. The marriage penalty crops up most often for couples who both earn similar, high salaries.
In 2010, husbands and wives earning more than $68,650 each in taxable income were at risk for paying more post-nuptials. (Of course, if your situation is the reverse, with one person bringing in most of the cash, then you're in luck — you're probably in for a tax break.)
The only way to outwit this challenge is to prepare for it by socking extra money away throughout the year so you're not shocked by your bill on tax day.
Newlyweds also often run into a different but related problem: not updating their Social Security account. Mark Luscombe, principal federal tax analyst for the tax firm CCH, says that if you changed your name, you need to update your Social Security account or the IRS won't be able to match your name and number, and your tax return could be rejected.
3. Counting on the baby tax credit
In addition to being lovable bundles of fun, babies can also give their parents tax breaks, but not all parents get to take advantage of this windfall. While new parents are sometimes eligible for deductions and child tax credits, most of these benefits phase out for higher-income taxpayers.
The child tax credit, for example, begins to phase out for married couples filing jointly if they earn a combined income of $110,000 or more. Regardless of the tax bracket, new parents should be sure to get the Social Security number of their newest family member so they can count them as dependents.
4. Overlooking other tax credits
With a little research, couples can often find relevant deductions and tax credits for everything from hybrid car purchases, child care, student loan, and mortgage interest to donations to charity, home upgrades that boost energy efficiency, and business expenses. The extra challenge for couples is keeping close track of all the paperwork throughout the year, so combining records when filing for credits doesn't lead to a paperwork disaster.
5. Forgetting about the taxes you'll have to pay later
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Taking advantage of tax-protected accounts such as 401(k)s that make saving easier is a great idea, but couples often forget to factor in the future taxes they'll have to pay on that money. A study by the University of Michigan's Retirement Research Center found that married college graduates were most at risk for this error.
While they tend to be well-prepared for retirement overall, they often overlook the taxes they'll pay as retirees. After taking them into account, preparation rates fall to 74 percent from an impressive 92 percent. To avoid running into this trap, use free online calculators to figure out just how much you'll need — and how much you'll be sharing with the IRS.
6. Letting one person do all the work
If you're married to an accountant, then letting him crunch all the numbers probably makes sense. But for most couples, such lopsided roles can lead to tension and even mistakes.
Instead, turn tax night into a geeked-out version of date night. Get comfortable, order takeout, and toast yourself with champagne when it's all over. Then brainstorm over how to spend the refund that's hopefully on its way.
Kimberly Palmer is a personal finance writer and the author of Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.