Real Estate

Getting Married: FAQs

Scarsdale CPA Paul Herman has all the answers to your personal finance questions! Getting married is an exciting lifetime milestone, but with it also comes major changes to your finances.

Marriage and finance faqs from scarsdale tax preparers

Get to know these FAQs before the wedding!

 

The following are frequently asked questions our Westchester CPA firm regularly receives regarding marriage and your financial situation:

 

 

Unmarried couples don’t:

  • Inherit each other’s property automatically. Married couples have the state intestacy laws to support them if they do not have a will. Under the law, the surviving spouse will inherit (at the minimum) a fraction of the deceased spouse’s property.
  • Have the privilege to speak for one another in a medical crisis. In the case that your life partner loses capacity or consciousness, someone will have to make the go-ahead decision for a medical purpose. It should be you, but if you haven’t filed certain paperwork, you may not have the ability to do so.
  • Have the privilege to handle one another’s finances in a crisis. A married couple that jointly own assets is less affected by this problem than an unmarried couple.
▼ How should unmarried couples protect their estate and financial holdings?

Here are some important steps to take for couples that are unmarried:

  • Draft wills. The chances of the intentions being followed through with after a death are greater if both partners make wills. Without wills, the probability of the unmarried surviving partner having no rights is more likely.
  • Think about owning property together. This is a way to guarantee that property will pass to the other joint owner at the time of the other’s death due to the right of survivorship.
  • Make a durable power of attorney. This will permit the partner to sign papers and checks and take care of other financial issues on his/her behalf should one become incapacitated.
  • Make a health care proxy. Also known as a medical power of attorney, this permits the partner to talk on your behalf to make medical decisions, should you become injured.
  • Have a living will. This lets your wishes regarding artificial feeding and other measures to prolong your life be known.
▼ Is more insurance necessary for married couples?

In the case of death, life insurance will provide a form of income for your dependents, children or whoever is your beneficiary. Because of this, married couples usually require more life insurance than singles.

Having someone dependent on your income will determine if you need to have life insurance. If someone such as a child, parent, spouse or other individual is dependent on your income, you should have life insurance. The following are situations where life insurance is necessary:

  • Single parents or families with young children or other dependents. The younger your children, the more insurance is necessary. Insurance should be in proportion to the amount earned. If both spouses are working, they should both be insured. If both earners cannot afford to be insured, the primary wage earner should be the first to be insured and the secondary will follow. To fill the insurance gap, a less expensive term policy may be used. Insurance should be bought to cover the absence of services such as childcare, bookkeeping, housekeeping, which are provided by the spouse that works within the home. The insurance that covers the non-wage earner is secondary to the insurance that covers the wage earner’s life, if funds are scarce.
  • Adults that have no children or other dependents. You will need less insurance than people in the previous situation if your spouse can live comfortably without income. However, some form of life insurance is still necessary. You will want at least enough to cover burial expenses, to pay off any debts you may have acquired, and to provide an easy transition for the surviving spouse. You may want to buy more insurance if you think your spouse would go through financial hardship without your income or if your savings aren’t adequate. This depends on your salary level as well as the amount of your spouse’s, the amount of savings you have and the amount of debt incurred.
  • Single adults without dependents. Unless you would like to use insurance for the purposes of estate planning, you will only need insurance to cover expenses for burial and debts.
  • Children. Typically, children only need life insurance to cover burial expenses and medical debts. An insurance policy could also be used as a long-term savings instrument, in some instances.
▼ Who needs to be notified if a spouse changes their name after marriage?

All organizations that you had correspondence with while using your unmarried name should be notified. You can begin with the following list:

  • The Social Security Administration
  • Department of Motor Vehicles
  • Post Office
  • Investment and bank accounts
  • Employer
  • Voter’s registration office
  • School alumni offices
  • Credit cards and loans
  • Club memberships
  • Retirement accounts
  • Subscriptions
  • Passport office
  • Insurance agents
▼ Should I update my will when I get married?

Definitely. When an important life event occurs such as marriage, it should be updated. If not, your spouse and other beneficiaries will not get what is meant for them at the time of your death.

▼ After marriage, what are the tax implications?

You are entitled to file a joint income tax return upon marriage. Although this simplifies the filing process, you will more than likely discover that your tax bill is either higher or lower than when you were single. It’s higher when you file together, as more of your income is taxed in the higher tax brackets. This is commonly known as the marriage tax penalty. In 2003, a tax law that intended to reduce the marriage penalty went into effect, but this law didn’t get rid of the penalty for higher bracket taxpayers.

Once married, you may not file separately in an attempt to avoid the marriage penalty. Actually, filing as married filing separately can raise your taxes. For the optimal filing status for your situation you should speak with your tax advisor.

▼ Can married couples hold property?

Yes. After marriage, there are many ways of owning property. They differ from state to state.

  • Sole tenancy, which is when one individual has ownership. The property is passed on in accordance with the will at death.
  • Joint tenancy, with the privilege of survivorship. Two or more people have equal ownership. The property is passed to the joint owner upon death. This should be used to effectively avoid probate.
  • Tenancy in common, property has joint ownership with the privilege of survivorship. The property is passed on according to your will upon death.
  • Tenancy by the entirety, like joint tenancy, with privilege of survivorship. This doesn’t allow a spouse to get rid of the property without the other’s consent and is only possible for spouses.
  • Community property, property that is gained through marriage that has equal ownership. States such as AZ, CA, ID, LA, NV, NM, TX, WA, and WI allow community property.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford Hills NY, Harrison NY, Larchmont NY, Scarsdale NY, Rye Brook NY, Pound Ridge NY, Purchase NY, Stamford CT and beyond.

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Risks of Interest-Only Loans

Scarsdale tax preparer Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

 

Not repaying principal, and therefore not building equity through debt retirement, means that an interest-only borrower is counting on market appreciation (price inflation) to help them own more of their home. Of course, this requires that prices increase while they hold the mortgage.

However, you don’t own the national realty market; you own a single home in a single neighborhood in a single town, and people will concede that prices can and do increase and decrease regularly on a localized basis. Scarsdale Accountant and Interest Only Loans RisksSo what does this mean to the interest-only borrower? There is a danger in not reducing the balance. If prices should fail to increase during the interest-only period, and if the borrower should find a need to sell the home, they could potentially be liable for thousands of dollars in sales costs which would need to be paid out of whatever equity (in the form of the down payment) they started out with.

The more extreme side of the first risk, of course, is that prices actually decline during the mortgage holding period. If our borrowers finds themselves in that situation, coupled with a low down-payment, they could easily find themselves “underwater” — a descriptive term that means they’ll sell the property for less than the remaining balance of the mortgage. In that unhappy case, the borrowers cannot sell without somehow coming up with what would likely be several thousand dollars to satisfy the mortgage balance as well as any sales charges (commissions, inspections, etc).

We noted before that payments made in the early years of a fully-amortizing are largely comprised of interest.

Interest Rate Risk

All the examples so far have been based on mortgages with a fixed interest rate. Unfortunately, most of the interest-only loans being made today feature only short fixed interest periods, if any; some featuring adjustable rates which can change each month. If history teaches us nothing else, it’s that low rates inevitably rise.
Above, we discussed term compression and its effect on payments, which causes them to rise above what they otherwise would be when the interest-only period ends. Now, magnify that compressed repayment term with a jump in interest rates, and you’ve got a recipe for a fiscal catastrophe.

Figure this: you, the interest-only borrower, have been happily making payments at $600 for the first five years of your (for now) fixed-rate loan. All the while, interest rates have been rising from their near-40 year lows to what could be considered “normal” — about 7% — and your monthly payment climbs over 40% to $848 per month. If you should find yourself in a period of considerably higher interest rates when the fixed-rate and interest-only period ends, your rate could climb to 9% or more — in which case your monthly payment could jump to $1,000 per month, or more.

Also at the moment, liberal and flexible mortgage underwriting standards are allowing borrowers to borrow more money for the same income, because qualifying ratios have been greatly expanded. Theoretically, a borrower’s budget might already be pretty stretched to the limit — and that’s before a nasty rate and payment hike.

Our Westchester CPA firm is here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Purchase NY, Mamaroneck NY, Bedford NY, Chappaqua NY and beyond.

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Sale of a New Home

Scarsdale tax preparer Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more frequently than once every two years. To qualify for this exclusion of gain, you must meet ownership and use tests.

  • Ownership Test: During the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years.
  • Use Test: During the 5-year period ending on the date of the sale, you must have lived in the home as your main home at least 2 years.

If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. But both of you would have to meet the use test to claim the $500,000 maximum amount. Home-For-Sale-Scarsdale-Tax-PreparerIf you do not meet the ownership and use tests, you may be allowed to exclude a reduced maximum amount of the gain realized on the sale of your home if you sold your home due to health, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.

If you can exclude all the gain from the sale of your home, you do not report the gain on your federal tax return. If you cannot exclude all the gain from the sale of your home, use Schedule D, Capital Gains and Losses, of the Form 1040 to report it.

For more details and information see IRS Publication 523, Selling Your Home, available at IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676).

Scarsdale CPA Paul Herman is here for all your personal finance needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Katonah NY, Mount Kisco NY, Rye NY, Bedford NY and beyond.

 

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.