Rich Spouse, Poor Spouse [Tax filing apportionment]

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Topic Author
Alistair
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Rich Spouse, Poor Spouse [Tax filing apportionment]

Post by Alistair »

So my spouse is uber-wealthy compared to me. When it comes to tax time, we generally file jointly. What we want is some way to 'separate' or apportion our tax liabilities, given our disparate incomes. Is there some obvious way to do this? My income is mainly salary, spouse's is mainly investment income. Filing singly always seems to be described as a bad idea.

It can't be that uncommon a request... Any Boglespouses deal with this?
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HueyLD
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Re: Rich Spouse, Poor Spouse

Post by HueyLD »

.............
Last edited by HueyLD on Sat Feb 07, 2015 2:39 pm, edited 1 time in total.
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ResearchMed
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Re: Rich Spouse, Poor Spouse

Post by ResearchMed »

Why not figure your taxes separately, for your own knowledge.

Are you otherwise separating expenses?

Assuming it is less expensive to file jointly, put the "extra you've saved" into something like a vacation account.
Or split it proportionately, if you are seriously separately paying for things.

RM
freddie
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Re: Rich Spouse, Poor Spouse

Post by freddie »

You can't file as a single and married filing separately tends to end badly. There isn't a 100% fair way. I would suggest you do your taxes as a single and that is your share. You could also do your taxes as a couple without her income and thats the amount you pay. The first one is a bit fairer but you have to figure out where deductions and the like go. In the second case she overpays.

Personally would expect other financial decisions to be much harder than taxes.
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VictoriaF
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Re: Rich Spouse, Poor Spouse

Post by VictoriaF »

HueyLD wrote:Get a divorce and continue to live happily together.
Get a divorce and ask the ex-spouse to adopt you.

Victoria
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sscritic
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Re: Rich Spouse, Poor Spouse

Post by sscritic »

Do you split the mortgage proportionally to income? Do you split the groceries proportionally to income?

If you can handle that, you can split the taxes as well.* Make sure you count the withholding to the proper source.

If you can't, meaning you use a common pot, then use the common pot for your taxes.

* If you don't use a strict proportional splitting, but use progressive splitting of the mortgage, then you can use progressive splitting of the taxes.
Last edited by sscritic on Thu Jul 24, 2014 12:38 pm, edited 1 time in total.
MathWizard
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Re: Rich Spouse, Poor Spouse

Post by MathWizard »

Doesn't happen in my house.

We're either both wealthy or neither is.

Some state income taxes are like ours and married filing separately is sometimes better than joint.
I used to do it both ways on paper, but TurboTax does that for me now.
I've never had MFS beat joint on the federal return.

The only advantage I can think of is if you really are keeping finances separate, and you are
being locked out of deductible tIRAs or something like that. In that case, I guess you
should file separately.
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Zabar
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Re: Rich Spouse, Poor Spouse

Post by Zabar »

How do you handle the rest of your finances? Separate checking/savings accounts? Separate investment accounts? Split restaurant checks? Individual fuel tanks in your cars? (OK, probably not that last one...or maybe two.) :happy

The mechanics of what you'd like are straightforward, although there are different approaches that will yield slightly different apportionments. The real question is what are you trying to accomplish by doing this?
sscritic
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Re: Rich Spouse, Poor Spouse

Post by sscritic »

MathWizard wrote: In that case, I guess you should file separately.
Note that that allows you to double the amount of paper I bonds you can get with your refund. The limit is per return, so two returns is twice as valuable as one.
Longtimelurker
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Re: Rich Spouse, Poor Spouse

Post by Longtimelurker »

My wife and I have an income disparity. I pay the bills and savings goals. She pays for fun stuff. We file jointly. We are happy. Why stress?
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
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Re: Rich Spouse, Poor Spouse

Post by Ron »

Longtimelurker wrote:My wife and I have an income disparity. I pay the bills and savings goals. She pays for fun stuff. We file jointly. We are happy. Why stress?
We've done it the same way for the last 45 years.

If we were worried about proper "allocations", we would have never gotten married, let alone lasted this long.

- Ron
Professor Emeritus
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Re: Rich Spouse, Poor Spouse

Post by Professor Emeritus »

DW has always had separate assets. We both had earned income. We filed jointly and she paid the full marginal excess tax due to her asset based income.
Last edited by Professor Emeritus on Thu Jul 24, 2014 12:54 pm, edited 1 time in total.
freddie
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Re: Rich Spouse, Poor Spouse

Post by freddie »

Longtimelurker wrote:My wife and I have an income disparity. I pay the bills and savings goals. She pays for fun stuff. We file jointly. We are happy. Why stress?
We shove all the money into one pot and go from there. Works for us. I know other couples who have been married for 20 years and they split the check at the restaurant. Seems to work for them.
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dodecahedron
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Re: Rich Spouse, Poor Spouse

Post by dodecahedron »

If your incomes are really disparate, chances are that you and your spouse are getting a big marriage bonus by filing jointly with you compared to two single returns.

Here is a simple and pretty easy to use calculator to calculate size of your bonus or penalty.

http://taxpolicycenter.org/taxfacts/mar ... ulator.cfm

and here is a nifty graphic that demonstrates the overall pattern: couples with similar incomes generally face a penalty while disparates generally get a bonus.

http://taxfoundation.org/article/effect ... l-equality
Last edited by dodecahedron on Thu Jul 24, 2014 1:01 pm, edited 1 time in total.
Boglegrappler
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Re: Rich Spouse, Poor Spouse

Post by Boglegrappler »

I"m not sure I'm following the origin of the question, but I'm assuming that it has to do with the fact that you keep your assets and bank accounts separately and contribute to joint expenses from each of them in some kind of "proportionality".

You could do a "dummy" tax return for each of you, and see what the taxes would be if you were each single, and then apportion the total tax from filing jointly in that ratio.

Or you could calculate your marriage penalty (the amount by which your joint tax exceeds what your combined "single" tax would be), and then divide that amount 50/50, with each person paying his own single person part of the overall tax.

I think with some of the new laws since 2012, there are some cases where allocating certain expenses to a lower earning spouse (in a married filing separately situation) might produce a positive outcome, but it depends on your overall income and whether you start to get into the region where they decide to treat high income people worse than everyone else.
Faith20879
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Re: Rich Spouse, Poor Spouse

Post by Faith20879 »

I know posters here keep assets either separate or combined and are happy with it.

But curiously, OP is asking about separate "tax liability" mentally - not assets or filing status.
bhsince87
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Re: Rich Spouse, Poor Spouse

Post by bhsince87 »

I think I can relate to your problem. My wife and I both maintain separate accounts from when we were single, and we've never opened a joint account. But we always file jointly (we usually work it out both ways in turbo tax, just in case).

My salary is 2-4 times larger than hers (mine is highly bonus dependent).

"My" taxable investment income is HUGE compared to "her" investment income. But the tax rate on that is 15% compared to our marginal 28-31% (federal).

She has a small business, with income close to half her full time salary. "She" has to pay quarterly estimated taxes on that income. And the marginal rate on that income is around 50% , so those checks can be quite large compared to her profits.

We struggled for a few years, trying to figure out a "fair" way to split the bill. We eventually concluded there is no cut and dried solution to this problem.

We set our withholding rates the same at work (however, my bonus gets withheld at a higher rate than my regular pay). I kick in whatever turbotax says the investment income adds to our taxes. She kicks in whatever turbotax says her business income adds to our taxes. Is that "fair"? I don't know...

If we owe any more (we almost always do) we take turns, or sometimes split it.

But at the end of the day, the government doesn't really care who earned which portion of our income. In their eyes, we both did. And most importantly, we're both equally responsible for paying ALL the taxes on it.

So the solution really boils down to cooperation and trust.
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Topic Author
Alistair
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Re: Rich Spouse, Poor Spouse

Post by Alistair »

Yes, those are the kind of issues.
Easy Rhino
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Re: Rich Spouse, Poor Spouse

Post by Easy Rhino »

My wife and I have only been married a few years, and our incomes are different but not super different.

you may as well figure out if married filing separately would be useful (it often isn't), just prepare two sets of tax returns and send in the best one.

As for apportioning the bill, my wife and I set our withholding as best as we can. And then, to keep it simple when filing in april (like to apportion a refund) I just assume that the tax paid should be in the same ratio as income earned (regardless of source of income). so for instance if our income proportion isn 60/40, then our tax proportion is also 60/40.

Although if we get a rebate, it's refunded in proportion to how much taxes we each paid through withholding.
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Ice-9
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Re: Rich Spouse, Poor Spouse

Post by Ice-9 »

We faced this same issue last tax season, as 2013 was our first year married. We decided to spend the entire refund on badly needed new appliances, and will try to put any future refunds to common expenditures as well.
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BL
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Re: Rich Spouse, Poor Spouse

Post by BL »

It doesn't hurt to calculate them separately (MFJ) to get an idea of where you are. If it costs more that way it doesn't make sense to me to file separately. I know of one case where he filed separately because he didn't think that the way she was doing it was legal and he wanted no part of it. There are some credits and a few other things that are restricted with MFS, I believe Roth contributions is one.

She may have capital gains taxed at a lower rate than your income is taxed.
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Alistair
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Re: Rich Spouse, Poor Spouse

Post by Alistair »

Thank you everyone who has tried to help. Let's do an example :)

Beer Spouse: 50k salary income
Champagne Spouse: 500k realised capital gains

What do we do?

If both spice just had salary income, I think I would work out the tax on 2x50k if MFJ and each would pay half of that, and champers spouse would pay the rest.

But champers spouse is lightly taxed on their capital gains which would seem to complicate things. :?
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BrandonBogle
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Re: Rich Spouse, Poor Spouse

Post by BrandonBogle »

ResearchMed wrote:Why not figure your taxes separately, for your own knowledge.

Are you otherwise separating expenses?

Assuming it is less expensive to file jointly, put the "extra you've saved" into something like a vacation account.
Or split it proportionately, if you are seriously separately paying for things.

RM
I like the "vacation account" idea. In our household, we haven't gotten married yet, so we file single and share expenses. But when I was in college, Mom and I had an agreement about this. I would do, BUT NOT SUBMIT, our taxes as single to create a "baseline". I then would redo them with her as Head of Household and me as a dependent. This usually resulted in a significant decrease in total tax. She would then gift me the difference of "me as dependent" and "me as single" and half of whatever extra we "netted".
sscritic
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Re: Rich Spouse, Poor Spouse

Post by sscritic »

I think we did it once (charge one more than the other). That was the year my wife took a large amount out of her IRA and put it in her separate account. She paid the marginal increase. Actually, since we lived in a community property state half of any earned income already belonged to each of us as did half of any withholding.

This didn't require filing separately, just doing the taxes once without the IRA withdrawal and once with.
linguini
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Re: Rich Spouse, Poor Spouse

Post by linguini »

Alistair wrote:Thank you everyone who has tried to help. Let's do an example :)

Beer Spouse: 50k salary income
Champagne Spouse: 500k realised capital gains

What do we do?

If both spice just had salary income, I think I would work out the tax on 2x50k if MFJ and each would pay half of that, and champers spouse would pay the rest.

But champers spouse is lightly taxed on their capital gains which would seem to complicate things. :?
I think you're overcomplicating this by trying to figure out what the "correct" apportionment of tax liability is, because there really is none. The government is calculating your combined tax liability because from their perspective, the two of you have one combined income and you are both jointly liable for it. There is no "my taxes" and "her taxes". So you just need to talk it out with your spouse and decide on some arbitrary split that seems roughly fair. Here are a few ways you could do it:

She pays 10x as much as you, so that you both pay proportional amounts relative to your salaries.
She pays 15x as much as you, because you earn less money and need to keep more of it for spending.
She pays 7.5x as much as you, because capital gains taxes are lower than earned income taxes and therefore she has proportionately less responsibility for the tax liability.
You pay whatever your company automatically withholds from your paycheck based on your maximum allowed exemptions, she makes up the difference, and you both call it a day.

Any of these work fine. None is better than any other. They're all completely arbitrary. There is no way to calculate this in a way that isn't arbitrary. So talk it out with your spouse and decide which one feels fair for the two of you.
MP1233
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Re: Rich Spouse, Poor Spouse

Post by MP1233 »

HueyLD wrote:Get a divorce and continue to live happily together.
If one were to ignore restrictions imposed by cultures and emotions, this is actually the best strategy given our current tax code. I do not know of any couples using this strategy, but there must be some out there.
MP1233
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Re: Rich Spouse, Poor Spouse

Post by MP1233 »

dodecahedron wrote:If your incomes are really disparate, chances are that you and your spouse are getting a big marriage bonus by filing jointly with you compared to two single returns.

Here is a simple and pretty easy to use calculator to calculate size of your bonus or penalty.

http://taxpolicycenter.org/taxfacts/mar ... ulator.cfm

and here is a nifty graphic that demonstrates the overall pattern: couples with similar incomes generally face a penalty while disparates generally get a bonus.

http://taxfoundation.org/article/effect ... l-equality
Great website. Found out that my wife and I are paying >$9000/yr more federal tax than if we had a religious wedding but continued to file as single.
Gnirk
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Re: Rich Spouse, Poor Spouse

Post by Gnirk »

My DH and I are in a similar situation. Only he's the rich spouse. We each have the same percentage taken out of our incomes: SS, retirement, RMDs, and it is enough to pay the taxes on the investment income. Often there is a refund which goes to my husband.
Am I paying more taxes than if I were single? Yes.
Am I living a better lifestyle than if I were single? Yes.
Do I want a portion of the refund? No
fanmail
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Re: Rich Spouse, Poor Spouse

Post by fanmail »

I don't get the keeping it seperate idea. When you marry, you join together, joint finances along with that.
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Alistair
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Re: Rich Spouse, Poor Spouse

Post by Alistair »

Cool - I'll tell her. Where do they sell yachts?
yosef
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Re: Rich Spouse, Poor Spouse

Post by yosef »

fanmail wrote:I don't get the keeping it seperate idea. When you marry, you join together, joint finances along with that.
+1 I just can't imagine a marriage where things are mine vs yours. Everyone's situation is unique, but that's just how I see it.
fanmail
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Re: Rich Spouse, Poor Spouse

Post by fanmail »

Sorry alistair, I meant no offense by it. I'm just confused by this style.
bcjb
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Re: Rich Spouse, Poor Spouse

Post by bcjb »

I agree. If "she" can buy a yacht, "you" can buy a yacht. (Of course, any self-respecting Boglehead will tell you to rent a yacht, not buy one.)

Edited to add that I do know several very happy long-term (10+) couples who split finances. In two cases, there's significant family wealth and the poorer in-law doesn't want to get involved or feel beholden to them. I'm sure you and your wife have a good reason as well.
Last edited by bcjb on Thu Jul 24, 2014 3:07 pm, edited 2 times in total.
mptfan
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Re: Rich Spouse, Poor Spouse

Post by mptfan »

freddie wrote:I know other couples who have been married for 20 years and they split the check at the restaurant. Seems to work for them.
Are you serious? To each his own, but that is not my idea of a marriage.
bhsince87
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Re: Rich Spouse, Poor Spouse

Post by bhsince87 »

At 50k and 500k, I would visit a tax professional/accountant. There's potentially a lot of money at stake.

But if I/we had to wing it, I'd suggest something like:

50ker pays 15% of 50K, or $7.5k. That would probably be close to the single rate, possibly with some deductions.

500ker pays 24% of 500k, or $120k. That seems to be around ballpark rate they would pay either single or married.

If that comes up short, 500ker pays the difference. If that's too much, 500ker pays less.

But that's just my personal opinion of "fair".
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Enkidu
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Re: Rich Spouse, Poor Spouse

Post by Enkidu »

Here is a simple suggestion-

Divide the taxes based on the effective tax rate of the combined income= tax paid/taxable income
Taxes on capital gain @ 15% on the larger income will keep the combined ETR low.

A more complicated alternative would be to compute the tax on your income MFJ as if it is the only household income. This would be your share of the taxes on the joint income after adding your wife's capital income.
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HomerJ
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Re: Rich Spouse, Poor Spouse

Post by HomerJ »

Poor spouse should just claim 0 exemptions (so max tax for his/her income is taken out)... And Rich Spouse pays any money due at the end of the year.
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Alistair
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Re: Rich Spouse, Poor Spouse

Post by Alistair »

Enkidu wrote:A more complicated alternative would be to compute the tax on your income MFJ as if it is the only household income. This would be your share of the taxes on the joint income after adding your wife's capital income.
That doesn't work because then all the MFJ allowances would be applied to my income... hence my suggestion of each paying half the tax due on twice my income, and the remainder coming from champagne spouse.
Mike Scott
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Re: Rich Spouse, Poor Spouse

Post by Mike Scott »

What's wrong with the "one pot" model? It makes no difference who makes how much.
Topic Author
Alistair
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Re: Rich Spouse, Poor Spouse

Post by Alistair »

You guys could have your own thread you know.
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TimeRunner
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Re: Rich Spouse, Poor Spouse

Post by TimeRunner »

With Turbotax, I calc mine as a single, hers as a single, and then MFJ, and apportion the MFJ in the same ratio as the two singles. It's not much work as you do the joint one first, then copy it and remove forms and adjust as needed for the more complicated single return, and just enter the single of the less complex one as a new file.

Yes it would be nice if everything was in one pot, but this is 2nd marriage for both of us (lessons learned), so we're both in the "what's mine is mine, what's yours is yours, and what's ours is ours" mindset...although it's becoming more joint with each passing year. C'est la réalité.
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downshiftme
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Re: Rich Spouse, Poor Spouse

Post by downshiftme »

So my spouse is uber-wealthy compared to me
I'm a big fan of the one pot model. But if you want to keep separate finances for some reason, then uber-wealthy should just pay 100% of the tax. It's mostly from uber-wealth anyway, and that's a small gesture of appreciation for putting up with the wealth disparity in your daily lives,
Topic Author
Alistair
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Re: Rich Spouse, Poor Spouse

Post by Alistair »

TimeRunner wrote:With Turbotax, I calc mine as a single, hers as a single, and then MFJ, and apportion the MFJ in the same ratio as the two singles.
Ah I see. That's also got a lot to recommend it I think.
Enkidu
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Re: Rich Spouse, Poor Spouse

Post by Enkidu »

Alistair wrote:
Enkidu wrote:A more complicated alternative would be to compute the tax on your income MFJ as if it is the only household income. This would be your share of the taxes on the joint income after adding your wife's capital income.
That doesn't work because then all the MFJ allowances would be applied to my income... hence my suggestion of each paying half the tax due on twice my income, and the remainder coming from champagne spouse.
You could also start with the combined MFJ income and tax, and then delete your wage income in Turbotax or other tax software. Difference would be the incremental income tax due to your wages.
sscritic
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Re: Rich Spouse, Poor Spouse

Post by sscritic »

Here is one the IRS should love:

1) Do joint return on both incomes. Do joint return with just her income. The difference is the marginal tax on his added income. He pays this amount.
2) Do joint return on both incomes. Do joint return with just his income. The difference is the marginal tax on her added income. She pays this amount.

:D
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Re: Rich Spouse, Poor Spouse

Post by camptalcott »

Ok. I know I'm new here but how does one spouse live rich and the other poor?

Seriously? I'm an old head so is this a new trend?
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Re: Rich Spouse, Poor Spouse [Tax filing status]

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (taxes). I also retitled the thread.
camptalcott wrote:Ok. I know I'm new here but how does one spouse live rich and the other poor?

Seriously? I'm an old head so is this a new trend?
It's not the lifestyle, but the disparity of taxable income. A salary is one income stream; another is from investments.
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freddie
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Re: Rich Spouse, Poor Spouse

Post by freddie »

Enkidu wrote:Here is a simple suggestion-

Divide the taxes based on the effective tax rate of the combined income= tax paid/taxable income
Taxes on capital gain @ 15% on the larger income will keep the combined ETR low.

A more complicated alternative would be to compute the tax on your income MFJ as if it is the only household income. This would be your share of the taxes on the joint income after adding your wife's capital income.
The single person making 50k has an EF tax rate of about 11% (would be much less if any money goes in a 401(k) or IRA). The person making 500k (assume all LTGC) is more like 17%. As a couple they will pay about 19%.

Who pays the AMT tax that is caused by being married? What about the exemption phaseout? What about the fact that the lower earner 50k is pushing more of the high earners 500k into the 23.8% LTGC bracket? And so on. I suppose breaking calculating the extra marriage tax and splitting based on income would be fair but a bit regressive.

Of course the real question is with 500k of income, why is someone working for 50k? Better off to become dependent on the rich person and move to a state the requires lifetime alimony:) Or more seriously what does 50k add to your life that makes it worth the time. Why keep playing the game after you already won.
tomd37
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Re: Rich Spouse, Poor Spouse [Tax filing status]

Post by tomd37 »

From a federal tax point of view and not considering any state tax that might be applicable, a couple that is married as of December 31st and living together at any time in the last six months of the year only has two federal filing choices; married filing jointly (MFJ) or married filing separately (MFS).

In the vast majority of cases (but not all) your tax burden will be less with MFJ than with MFS filing status. Certain tax benefits are lost when using MFS filing status. Please refer to the special rules found on page 22 of IRS Publication 17 available online at http://www.irs.gov under the forms and publications tab.

I have counseled many taxpayers when they initially want to file federal tax returns using MFS filing status. There usually is some type of alternative available to them, especially if one of the couple owes some monies to the federal government. They usually, but not always, end up using MFJ status.
Tom D.
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Re: Rich Spouse, Poor Spouse [Tax filing status]

Post by sscritic »

Actually the thread is not about filing status, in spite of the addition to the title.

The question is about apportionment. The filing will be MFJ; the question is who pays.
What we want is some way to 'separate' or apportion our tax liabilities
Note the single quotes around separate; that is not a filing status, it is a verb, and it is not pronounced the same way as the adjective, at least the way I speak English.
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