Whether you’ve been together for years or decades, 2014 taxes will be the first time many LGBT married couples will be able to file jointly on their federal tax returns. This new federal recognition may bring with it the dreaded marriage penalty, so be proactive. Don’t wait until April 15 and risk getting shocked by a surprisingly high bill from the tax man, or miss year-end deadlines for various tax saving opportunities. Here are a few things you should do now to be tax-wise by year end.
Get on the Same Page as Your Spouse
Now that you are legally married and can file your taxes jointly you need to work together to keep as much of your hard-earned money as possible. As you’re a married couple, some deductions may now make sense that didn’t in the past. On the other hand you may end up in higher tax brackets with your money pooled together, or your new, higher combined incomes may reduce other potential tax deductions. If this is your first year filing together, a review of your situation is highly recommended to avoid any surprises come tax time.
Review Prior Years Tax Returns
If you were legally married but not receiving federal recognition, you may be able to revisit your tax returns for up to three years prior, so you can refile those tax returns as a married couple. I’ve worked with many people who were able to get thousands back with amended tax returns. It never hurts to check and see if you are owed a refund. (But if filing as a married couple would have raised your tax bill, you should just leave things as they are).
Give Your Investment Portfolio a Checkup
Ask your financial planner if there are any tax-harvesting opportunities in your nonretirement accounts. This can be a great way to reduce the tax drag on your account. Saving money on taxes within your portfolio is like additional return on your investment without taking any more risk. Investors in higher tax brackets should look to capture losses to help offset gains. However, if you happen to be in a lower tax bracket you may end up with the 0 percent capital gain rate for the year (income under $73,800 for a married couple) you may want to lock in some of the gains in your portfolio.
This the time of year to do some winter cleaning: clean out the garage and closets and donate all that stuff to a charity. You'll do some good and get a nice tax deduction in the process. Try to use a check or credit card to ensure you have proof of your generosity, in case the IRS questions your donation.
Invest in Yourself: Max Out Your Retirement Accounts
Want to lower your tax bill? Do you want to retire some day? If you answered yes to both, contributing to your retirement accounts can be a win-win. The money you contribute to a 401(k) or an IRA is excluded from your income, helping you reduce your tax bill. Also that money can now be invested to help build your retirement nest egg.
If you currently are not on track to max your accounts out, you can direct some extra money from your last few paychecks to get as much money into the account as possible. This year you can contribute up to $17,500 to a 401(k). You have until tax time to fully fund an IRA or Roth IRA if you qualify. That can be another $5500 deduction. If one spouse does not work, you can now also take advantage of a spousal IRA. Just something to think about.
Is your income growing or shrinking? If it’s shrinking, deductions may be worth more this year, or vice versa. You may want to pay some things like the January mortgage payment before year end to push more of the deductions into this year. If your income is growing, you may want to put things like charitable deductions off until January so you can deduct them next year.
In any case, don’t forget it’s not how much you make but how much you keep. With the tidal wave of marriage equality spreading across the USA over the past year, many same-sex couples will be filing jointly for the first time. As if filing taxes wasn’t complicated enough, your first time filing as a married couple may throw off the balance you’ve developed filing separately all these years. Work with your trusted financial professionals before the end of the year to make sure you are taking advantage of all the opportunities your newfound marriage equality are presenting you in regards to your taxes.
DAVID RAE, CFP®, is a retirement planning specialist with Trilogy Financial Services, specializing in the needs of the LGBT community. Follow him on Twitter @davidraecfp or via his website, DavidRaeFP.com.
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA, SIPC, a Registered Investment Advisor. Trilogy and NPC are separate and unrelated entities.