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When the Honeymoon Is Over …

June 29, 2006
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Being prepared is more than a Scouts motto; it's a good idea for those just getting married, too. And it doesn't hurt those who no longer qualify as newlyweds.

When the honeymoon is over, the bills don't stop coming. That trip to Niagara Falls falls by the wayside for a moment when water from a storm damages your house.

Financial emergencies can and do occur. The good news is that with a little planning you can minimize the impact of an unexpected financial crisis.

The Pennsylvania Institute of Certified Public Accountants suggests that you take the following actions.

• Calculate Your Net Worth. Looking at your total financial picture is a simple way to know exactly where you stand. Take the time to prepare a net worth statement, which will give you a realistic sense of your assets (what you own) and your liabilities (what you owe).

First, catalog your assets. These include balances in your savings, checking and other bank accounts; the market value of any stocks, bonds, mutual funds and individual retirement accounts; and the cash value of any insurance policies you own. Include in your assets the fair market value of your home (less your remaining mortgage), and other real estate and personal property.

Next, you'll need to list all debts, including the outstanding balance on your mortgage, credit cards, and any car, personal, or student loans. Subtract your total liabilities from your total assets to arrive at your net worth.

This exercise makes it easier for you to identify assets that could be used to meet your debt obligations.

• Build an Emergency Fund. Most CPAs agree that it's a good idea to create an emergency fund equal to roughly six to nine months worth of living expenses. The right amount for you depends on your financial circumstances.

It will take time and a few sacrifices to set aside that amount of money, but it's worth the peace of mind it can provide in an emergency. Using an automatic savings plan to direct money to your emergency fund is a relatively painless way to save.

Be sure to keep your emergency funds in an easily accessible account, such as a savings or money market account. While the interest rate may be low, bear in mind that liquidity is the goal for your emergency fund.

• Be Adequately Insured. One of the best defenses against financial difficulties is a well-formulated plan for insuring yourself and your possessions.

Review your home, car, life and medical insurance polices regularly to ensure sufficient coverage.

Disability coverage is one area where many find themselves underinsured. Disability insurance replaces a portion of your salary if you become injured and cannot work. Since people in the workforce are more likely to be disabled than to die prematurely, disability insurance is vital to financial security.

• Identify Possible Loan Sources and Apply Now. If you own your home, a home-equity line of credit can help you through a financial emergency. But it's important to apply now, while you're in good health and employed.

Unlike a home-equity loan, a line of credit is there if you need it. Another advantage is that you can write off the interest on your home-equity debt, up to $100,000. Just remember that you could lose your home if you can't pay back money borrowed against it.

As for those facing being a twosome for the first time? Marriage brings many joys and a few unexpected challenges, such as filing your taxes together. By starting an income tax to-do list well in advance of tax season, filing your first return as husband and wife will go more smoothly.

Here are several suggestions:

• Update Records. A woman who takes her husband's surname upon marriage should notify the Social Security Administration and her employer of the change. This helps ensure that earnings are properly reported and credited.

To get a Social Security card printed with your new name, complete Form SS-5, Application for a Social Security Card.

The application is available on the SSA Web site at: www.ssa.go.

Newlyweds should also submit new W-4 forms with their employers so paycheck withholding reflects their new marital status.

Additionally, newlyweds may want to make an estimate of the year's income, deductions and tax liability to be sure that the tax withheld from their paychecks is sufficient to cover the tax on their incomes. If needed, one spouse may request an additional amount be withheld for income taxes.

• Filing Status. It doesn't matter if you were married on Jan. 1 or Dec. 31 or anytime in between, the IRS treats you as being married for the entire year, so you must file as a married taxpayer. You need to consider whether filing jointly or separately is better for your personal financial situation.

Choosing the best filing status is a major tax decision for newlyweds. When you file jointly, you combine your income, deductions and credits all on one income-tax form. Generally - but not always - filing a joint return results in the lowest tax bill. Keep in mind that when you file a joint return, both spouses are liable for everything on the return.

Filing separately may be a better choice if one spouse has high medical expenses or miscellaneous itemized deductions. Since in both cases you can only deduct expenses in excess of a specific threshold (7.5 percent of adjusted gross income for medical expenses and 2 percent for miscellaneous deductions), combined income on a joint return would make it more difficult to qualify.

On the other hand, keep in mind that some tax credits and deductions are reduced or eliminated for married couples filing separately. For example, separate filers can't take advantage of education tax credits or deduct student-loan interest.

Figuring your taxes both ways is the best way to determine which filing status results in the lowest tax bill.

 

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