Tax Advice for Couples Considering Remarrying: Part Threeby
In two previous columns, I explained why couples entering into second or third marriages should consider the tax consequences beforehand. To explain how I’d counsel them, I created Marsha (third marriage for her) and John (fourth one for him).
I advised her to scrutinize his returns; they can provide many kinds of insights into him. In a previous column, I discussed five such items. Below are another five items:
1. Medical Expenses
Those outlays are claimed at the top of Schedule A and are allowable only to the extent that their total in any one year exceeds a specified percentage of adjusted gross income. I remind Marsha that Congress keeps changing the nondeductible floors.
For 2016 and earlier years, the floors were 10 percent and 7.5 percent for those older than 65. For 2017 and 2018, they’re 7.5 percent for all individuals. For 2019 and later years, the Tax Cuts and Jobs Act restores the threshold to 10 percent for John and everyone else, assuming Congress doesn’t revise the rules again.
Year in and year out, John claims hefty deductions for medical expenses that exceed the floors. True, he might be able to easily explain the deductions as attributable to payments for insurance premiums and expenses usually not covered by insurance, such as dental work, hearing aids, glasses, medically required home improvements or private duty nurses.
But I point out to Marsha that there could be another reason for substantial write-offs: John sees a psychologist or psychiatrist. There’s nothing wrong with that. But Marsha should know what issues John is grappling with—and also share the emotional struggles she has.
John’s Schedule A shows he’s a chintzy contributor, whereas Marsha’s return shows she’s a generous giver. While that needn’t be a deal breaker, they should discuss donations before marriage.
3. Schedule C
As John operates his dental practice as a sole proprietorship, he files a Schedule C. A cursory review of the amounts entered for business receipts and expenses suggests he’s understating gross receipts and overstating expenses. Whereas dentists in his area typically claim expenses equal to about 50 percent of gross receipts, his expenses equal about 75 percent of gross receipts.
A plausible explanation for the discrepancy: John doesn’t deposit cash payments received from patients into the practice’s bank account, and he tells his accountant to use bank deposits to calculate gross receipts. Marsha shouldn’t hesitate to ask John whether he’s trying to pull one over on the IRS.
Like millions of other Americans, John receives big refunds every year, either as a deliberate form of forced savings or simply by neglecting to claim enough exemptions on W-4 forms. But interest-free loans to the IRS are anathema for someone like tax-savvy Marsha, who meticulously monitors her withholding from wages and outlays for estimated payments, and thus files tax returns that usually show small balances due.
Filing jointly could mean that they receive no refunds. That could be a big disappointment for John, who is used to getting checks. It’s a good idea for them to discuss how they'll handle withholding.
5. Midst these thorns, there are some roses...
Assume John’s Schedule D shows a substantial capital loss carryforward and no unrealized capital gains. At $3,000 a year, it will take many years for him to use up his carryforward. Marsha, however, has a substantial unrealized capital gain. Marriage means she can realize the gain and offset it against John’s carryforward.
Similarly, suppose he operates a business that’s unprofitable. He has a hefty net operating loss carryforward, but not enough other income to absorb the carryforward. Marsha has sizable income. Marriage enables him to apply his carryforward against her income.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting).