When two people fall in love, they tend to be blind to life’s realities. The last thing they want to do is bring up issues that might generate conflict, and let’s face it, the topic of taxes is definitely turbulent.
Ask these tough tax questions before you get married – to avoid an inevitable divorce.
After decades of working with people in tax trouble, I have learned that financial misunderstandings are the root of all evil. They generate tax problems, budget problems, bankruptcies, divorces, and flat-out nastiness. This is especially true when both partners are not truthful before marriage.
For instance, a friend of mine married a man who had neglected to tell her a few important things about his finances. He had an outstanding IRS tax lien for over $10,000 left over from his previous marriage. Because my friend and her new husband had comingled funds, the IRS took the money from her bank account.
Although my friend’s husband claimed to be an executive, he had not had a stream of income for some time. He ended up dissipating all her assets, including a substantial inheritance.
Fortunately, you can protect yourself by asking a few key questions and by requesting your prospective spouse’s permission to get some important financial reports on him or her. You should share the same information with your spouse-to-be:
File a Form 4506T request with the IRS for each of you. Request a copy of Form 1040 on line six, check all the boxes on the form, and enter the last four years on line nine (i.e., 2015, 2014, 2013, 2012).
Or, you can log into the the IRS’s Get Transcript system with your fiance'(e) and get the information on the spot.
When you send the form back to the IRS, the agency will send you the tax forms for the years you requested, and you’ll know if your future spouse has filed tax returns in the last four years. You’ll also learn whether he or she owes the IRS any money. If you fear that your soon-to-be spouse may owe outstanding balances for more than the past four years, you can request the last 10 years’ data.
Each order your own Equifax credit report to share with the other. Consider opting for a report that gives you information from all three nationwide credit reporting agencies. Doing so will alert you to liens, levies, a poor credit history, and more.
Once you have these reports in hand, it will be easier to start the money conversation. Thoroughly read the information in the reports and ask questions about anything you don’t understand, but don’t be hostile or accusing.
Ask the right questions. It’s important to be on the same page with your partner before you tie the knot. If your answers to the following questions differ, discuss your points of view rationally.
- What is your attitude towards money? Are you frugal, stingy, wasteful, or balanced?
- Do you gamble? How? Do you gamble online or in casinos? Do you make bets with friends?
- Do you owe any gambling debts?
- Are you willing to live on a budget?
- What big purchases are you itching to make in the next few years, and how do you plan to pay for them?
- Do you have child or spousal support obligations? Do you meet these obligations on time?
- How are your relationships with your ex and your children? How will those relationships impact our lives, financially and emotionally?
- Is there any reason why we might have to keep our finances separated, at least in the beginning?
These are just some questions to bring up. Sit and think about things that matter to you and make a list that works for your situation. That way, you’ll be prepared to have a calm and rational conversation. I do hope it works out!
2 comments on “Eight Tax Questions To Ask Before You Get Married”
Nice post. Although this is written from an “Inside The USA Perspective”, it’s important for “prospective spouses” to know about the “citizenship(s)” of the other. In particular, it is important that one know (if one is living outside the United States) whether the potential spouse is a U.S. citizen or Green Card Holder.
The reason is that “U.S. citizens” and “Green Card Holders” are required to file U.S. tax returns regardless of where they live in the world. They are subject to the Internal Revenue Code rules that a Homeland American is subject to. Furthermore, they are subject to extensive and invasive reporting requirements (including disclosure of joint accounts). Here are some “categories of life” that will be harder if you are married to a U.S. citizen:
Family finances and retirement planning
Remember: U.S. citizens (and Green Card Holders) living outside the United States are subject to U.S. tax rules that govern all American citizens living abroad. Americans abroad may be unable to have the “tax deferred” benefits of company pension plans. They will be unable (without punitive tax consequences) to invest in non-U.S. mutual funds. In many countries the sale of a principal residence is a tax free capital gain. (This is not the case for U.S. citizens.) They will have difficulty attempting self-employment using small business corporations. To put it simply: For families residing outside the United States, marriage to a U.S. citizen (or Green Card Holder) will be a severe burden and drain on the family finances. The family will not have the same financial and life planning opportunities that “non-U.S. citizen” families will have.
Transfer of property between spouses
In a marriage it is normal for property to be transferred between spouses. If both spouses are U.S. citizens property can be transferred on a “gift-tax free” basis. This is NOT so if a U.S. citizen is married to an “alien”. U.S. citizens are limited in the amount that they can transfer to the “alien spouse” without the potential of “gift tax”.
Divorce
Divorce will be much more complicated, difficult and costly if a a “non-U.S. citizen” is married to a U.S. citizen. The primary reason is that U.S. citizens transferring property to non-citizens have to consider more tax implications of the property transfer.
Death
Bequests are similarly burdened by the citizenship of the spouses. A U.S. citizen is NOT permitted (as a general rule) to leave unlimited property to the non-citizen spouse.
In summary
In contemplating marriage one should give careful consideration to a potential spouse’s financial history (including tax history).
In a world where divorce is common, those who are NOT U.S. citizens, should give careful consideration to the implications of marriage to a U.S. citizen or Green Card Holder!
To be forewarned is to be forearmed!
“Married filing separately” – The default tax filing status for a U.S. citizen who is living outside the U.S. married to a “non-U.S. spouse”
In most cases the non-U.S. spouse (“alien”) would NOT want to be a “U.S. taxpayer”. This means that an American living abroad married to an “alien spouse” would use the “married filing separately” category – which is an extremely punitive filing category. Once understood, one sees that “married filing separately” is a hidden tax on Americans abroad. This means that the U.S. spouse will use the “married filing separately” filing status. The “married filing separately” is problematic for reasons that include:
– you will enter higher tax brackets at lower levels of income
– the requirements to file certain information returns (including From 8938) will be triggered at lower levels of income
– both the Alternative Minimum Tax and the Obamacare surtax will be triggered at lower levels of income.
Tax rules that hurt one member of the family will hurt the family unit.
It is “taxing” for a non-U.S. citizen to be married to a U.S. citizen.
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