Marriage: Is it tax-friendly?

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g3d
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Marriage: Is it tax-friendly?

Post by g3d » Wed Aug 06, 2014 8:48 am

Please weigh in on this hypothetical (not so hypothetical) situation of mine to evaluate the tax benefits of marriage.

Take two income earners with identical salaries, let's say they each make $75k a year. If those two individuals were to file as singles, they would be taxed in the 25% bracket. But, if they were married and filing, they would be up into the 28% tax bracket. As those income earners continue to earn raises, they continue to increase their tax rate as a result of being married.

I know that when the income difference between a married couple is considerable, combining the salaries actually can help your tax bracket quite a bit. Does the math always work out this way when you consider other tax benefits of marriage? I believe there is an additional deduction you can take when you're married (other benefits I am not aware of), but as a new college grad, tax filing is a scary and foreign concept to me.

Feel free to suggest I'm a horrible human being for considering the economic implications of the eternal bonds of holy matrimony...I welcome any and all opinions!

sscritic
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Re: Marriage: Is it tax-friendly?

Post by sscritic » Wed Aug 06, 2014 8:55 am

You are not horrible for realizing it is what it is, but you shouldn't use that as a determining factor. When I got married the second time, both my wife and I had to give up survivor benefits that required us to be unmarried. We got married with that knowledge, not in ignorance of it.

In a sense, you can take the increase in taxes as a measure of your commitment to each other. If your marriage would cause you to go to a 40% bracket up from a 25% bracket, would you still do it? If not, why not? Is everything really about money?

awval999
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Re: Marriage: Is it tax-friendly?

Post by awval999 » Wed Aug 06, 2014 8:59 am

The answer to the title of your post is "it depends".

In my personal situation where one spouse has a high income and one has a low income it is beneficial. In your situation where the spouses make identical salary it can cause a marriage tax penalty.

Tabaxus
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Re: Marriage: Is it tax-friendly?

Post by Tabaxus » Wed Aug 06, 2014 9:06 am

I know at least one couple that jokes about getting divorced and remarried every year because of the marriage tax penalty. It's a significant issue when both people have higher incomes. I don't know of anyone who has allowed it to dissuade them from getting married, but then again, marriage is pretty rarely made through the lense of rational economic choices (see: not getting married by a justice of the peace in a courthouse, not signing a prenup where one makes sense, getting remarried when it costs people survivors' benefits or spousal/child support, yadda yadda yadda), and I'm sure there are, in fact, couples out there who have decided not to get married because of the tax hit.

The Wizard
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Re: Marriage: Is it tax-friendly?

Post by The Wizard » Wed Aug 06, 2014 9:08 am

There may be economies for two well-paid working people living together even with the marriage tax penalty.
Both partners would need to be bogleheads to take advantage of this situation...
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Tabaxus
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Re: Marriage: Is it tax-friendly?

Post by Tabaxus » Wed Aug 06, 2014 9:10 am

The Wizard wrote:There may be economies for two well-paid working people living together even with the marriage tax penalty.
Both partners would need to be bogleheads to take advantage of this situation...


Eh, all of the economics can be captured without getting married. Vast majority of people live together for at least some period of time before marrying anyway.

g3d
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Re: Marriage: Is it tax-friendly?

Post by g3d » Wed Aug 06, 2014 9:10 am

The Wizard wrote:There may be economies for two well-paid working people living together even with the marriage tax penalty.
Both partners would need to be bogleheads to take advantage of this situation...


Can you elaborate?

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dodecahedron
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Re: Marriage: Is it tax-friendly?

Post by dodecahedron » Wed Aug 06, 2014 9:10 am

Here is a convenient marriage tax penalty calculator you can use:
http://taxpolicycenter.org/taxfacts/mar ... ulator.cfm

Here is a nifty graphic summarizing the effects of marriage penalties and bonuses, showing the overall tendency for penalties to increase as the spouses' incomes become more similar and for bonuses to increase as spouses' incomes diverge.

http://taxfoundation.org/article/effect ... l-equality

But marriage is (or ought to be) a long-term arrangement. When my late husband and I married in the late 1970s, we faced enormous marriage penalties at the time (because marginal tax rates were very high and our incomes were literally equal at the time. We had jobs with the same title and salary with the same employer.) As economists, we knew this very well, but felt that marriage trumped the importance of worldly matters.

Over the course of time, tax rate schedules decreased, there were various other modifications to the tax code that somewhat mitigated the marriage penalties, and then there were later years when my income was greater than his and vice/versa. I'd say we came out at least even or better during the period when both of us were alive.

And now that he is gone, there are *many* benefits from the fact that we were married. No federal or state estate taxes. I was able to roll all of his retirement accounts into my own tax-deferred accounts and treat them as my own, in a way that a non-spouse beneficiary would not have been allowed to do. It massively simplified the probate process and associated expenses. I have the option to file as early as 60 for survivor SS benefits while letting those on my own work record grow until 70 (with no penalty for the fact that I collected survivor benefits early) OR I can file as early as 62 for SS benefits on my own record while letting my survivor benefits grow until FRA of 66 (with no penalty for the fact that I collected on my own work record early.)

If he had been hospitalized and unable to make decisions about his health care, I would have had unquestioned authority to visit him and to make decisions about his care.

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Re: Marriage: Is it tax-friendly?

Post by The Wizard » Wed Aug 06, 2014 9:23 am

g3d wrote:
The Wizard wrote:There may be economies for two well-paid working people living together even with the marriage tax penalty.
Both partners would need to be bogleheads to take advantage of this situation...


Can you elaborate?

Take my own example: single, owning my own house, paying property taxes and utilities of maybe $10,000 per year.
If I was married to someone of similar financial status, we might each contribute $5000 toward the house and put the remaining $5000 toward either frivolous expenditures or investments...
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crowd79
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Re: Marriage: Is it tax-friendly?

Post by crowd79 » Wed Aug 06, 2014 9:30 am

Costs for a single person are higher than a married couple. Single person pays for a whole house, rent, etc on one income. Two people can split it. Marriage penalty is justified IMO.

Tanelorn
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Re: Marriage: Is it tax-friendly?

Post by Tanelorn » Wed Aug 06, 2014 9:32 am

I'm not an expert on SS benefits, but I'm pretty sure you don't need to get married now to get them later. There's a 10 year requirement for something and I think most are shorter, but even in the 10 year case you could wait until the older person is in their 50s to get married for this financial reason (assuming the income tax penalty made it advantageous to not be married otherwise). And that also assumes that the SS benefit would be worth more than the income tax one, which you'd have to check.

crowd79 wrote:Costs for a single person are higher than a married couple. Single person pays for a whole house, rent, etc on one income. Two people can split it.

And you can split it with roommates or a couple without getting married too.
Last edited by Tanelorn on Wed Aug 06, 2014 9:34 am, edited 1 time in total.

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dodecahedron
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Re: Marriage: Is it tax-friendly?

Post by dodecahedron » Wed Aug 06, 2014 9:34 am

This thread comes at an interesting time for me, as I am actually working on my final joint tax return with my late husband (due in April but I requested an extension until October) as well as the Federal and state estate tax filings (due this month).

More tax benefits of marriage:

1) I get to file MFJ for the year of his death, taking full advantage of the joint rate structure and his exemption for the year, even though he did not live all the way through it. (His income that came in after his death goes on the estate income tax return, Form 1041, instead of our joint return.)

2) Because I have a dependent young adult child (college student) and because I was eligible to file MFJ in the year of his death, I get to file as a "Qualifying Widow" for this year and next year, which gives me two years more access to the MFJ tax brackets.

And there are so many other nontax benefits associated with our legal marriage. Pension rights, for example. One of his former employers had a DB pension and I was given option of collecting 50% survivor DB pension (or taking lump sum). If we had not been married, that money would have disappeared. There was no way for him to designate a nonspouse survivor for that DB pension.

Also, family health insurance plans with employer subsidies would not have been an option if we had not been married. It was frequently less expensive for only one of us to accept the employer insurance family plan to cover the spouse. And even if the employer had allowed us to cover a non-spouse "domestic partner", there would have been unfriendly tax treatment.

And so many tiny little details--switching the registration for our cars involved streamlined paperwork and lower fees at the DMV because I was a spouse rather than an unrelated beneficiary under a will.

As it is, the year since his death has been a nightmare full of paperwork, but it would have been far more challenging if we had not been married, not to mention far more expensive. I would happily give up all the tax benefits if only I could bring him back, but since I can't, I can at least be grateful that the laws make this time a little bit easier for me.
Last edited by dodecahedron on Wed Aug 06, 2014 9:48 am, edited 1 time in total.

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dodecahedron
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Re: Marriage: Is it tax-friendly?

Post by dodecahedron » Wed Aug 06, 2014 9:43 am

Tanelorn wrote:I'm not an expert on SS benefits, but I'm pretty sure you don't need to get married now to get them later. There's a 10 year requirement for something and I think most are shorter, but even in the 10 year case you could wait until the older person is in their 50s to get married for this financial reason (assuming the income tax penalty made it advantageous to not be married otherwise). And that also assumes that the SS benefit would be worth more than the income tax one, which you'd have to check.


The ten year rule is actually a rule applying to divorced spouses who wish to claim on an exspouse's record. There are shorter periods that apply to those who remain married to one another until the death of a spouse, so yes, theoretically one could wait until a later point in life to get married and still get SS spousal and/or survivor benefits, but my husband's completely unexpected death (heart attack in his sleep with no advance warning while still in his 50s) illustrates that there is a limit to this kind of timing.

sscritic
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Re: Marriage: Is it tax-friendly?

Post by sscritic » Wed Aug 06, 2014 10:02 am

If you plan on getting married at 65 to a person with high SS benefits on their death bed, it won't work. Although if that person's spouse has been in an institution for the mentally incompetent and you have been dating while that person was married, you might pull it off, but only if you act quickly. Remarriages are a different matter.
(1) Your relationship to the insured as a wife or husband lasted for at least 9 months immediately before the insured died.
(2) Your relationship to the insured as a wife or husband did not last 9 months before the insured died, but you meet one of the conditions in paragraphs (a)(2)(i) through (iv) of this section.
    (i) At the time of your marriage the insured was reasonably expected to live for 9 months, and the death of the insured was accidental. The death is accidental if it was caused by an event that the insured did not expect, if it was the result of bodily injuries received from violent and external causes, and if, as a direct result of these injuries, death occurred not later than 3 months after the day on which the bodily injuries were received. An intentional and voluntary suicide will not be considered an accidental death.
    (ii) At the time of your marriage the insured was reasonably expected to live for 9 months, and the death of the insured occurred in the line of duty while he or she was serving on active duty as a member of the uniformed services as defined in § 404.1019.
    (iii) At the time of your marriage the insured was reasonably expected to live for 9 months, and you had been previously married to the insured for at least 9 months.
    (iv) The insured had been married prior to his or her marriage to you and the prior spouse was institutionalized during the marriage to the insured due to mental incompetence or similar incapacity. During the period of the prior spouse's institutionalization, the insured, as determined based on evidence satisfactory to the Agency, would have divorced the prior spouse and married you, but the insured did not do so because the divorce would have been unlawful, by reason of the institutionalization, under the laws of the State in which the insured was domiciled at the time. Additionally, the prior spouse must have remained institutionalized up to the time of his or her death and the insured must have married you within 60 days after the prior spouse's death.

MP1233
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Re: Marriage: Is it tax-friendly?

Post by MP1233 » Wed Aug 06, 2014 10:03 am

g3d wrote:Please weigh in on this hypothetical (not so hypothetical) situation of mine to evaluate the tax benefits of marriage.

Take two income earners with identical salaries, let's say they each make $75k a year. If those two individuals were to file as singles, they would be taxed in the 25% bracket. But, if they were married and filing, they would be up into the 28% tax bracket. As those income earners continue to earn raises, they continue to increase their tax rate as a result of being married.

I know that when the income difference between a married couple is considerable, combining the salaries actually can help your tax bracket quite a bit. Does the math always work out this way when you consider other tax benefits of marriage? I believe there is an additional deduction you can take when you're married (other benefits I am not aware of), but as a new college grad, tax filing is a scary and foreign concept to me.

Feel free to suggest I'm a horrible human being for considering the economic implications of the eternal bonds of holy matrimony...I welcome any and all opinions!


My wife and I got married when we were graduate students, and we did not make enough money to consider tax code consequences. We are now in our 50s and we both make more than $100k per year. Our marriage penalty is over $9000/year. If we knew then what we know now, we would have gotten married but continued to file as single.

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Re: Marriage: Is it tax-friendly?

Post by dolphinsaremammals » Wed Aug 06, 2014 10:10 am

sscritic wrote:During the period of the prior spouse's institutionalization, the insured, as determined based on evidence satisfactory to the Agency, would have divorced the prior spouse and married you, but the insured did not do so because the divorce would have been unlawful, by reason of the institutionalization, under the laws of the State in which the insured was domiciled at the time.


There are states where you can't divorce a hopelessly insane person?

g3d
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Re: Marriage: Is it tax-friendly?

Post by g3d » Wed Aug 06, 2014 10:16 am

dodecahedron wrote:1) I get to file MFJ for the year of his death, taking full advantage of the joint rate structure and his exemption for the year, even though he did not live all the way through it. (His income that came in after his death goes on the estate income tax return, Form 1041, instead of our joint return.)

2) Because I have a dependent young adult child (college student) and because I was eligible to file MFJ in the year of his death, I get to file as a "Qualifying Widow" for this year and next year, which gives me two years more access to the MFJ tax brackets.


Thanks for sharing, dodecahedron.

For clarification's sake, in my early 20s, the question of marriage is probably when, not if. If you have a committed partner (whom you are sharing costs with) in your early 20s, it sounds like delaying marriage a couple or five years can have a five figure financial tax implication.

Are the only realized benefits of marriage in this income situation the cost sharing?

sscritic
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Re: Marriage: Is it tax-friendly?

Post by sscritic » Wed Aug 06, 2014 10:16 am

dolphinsaremammals wrote:
sscritic wrote:During the period of the prior spouse's institutionalization, the insured, as determined based on evidence satisfactory to the Agency, would have divorced the prior spouse and married you, but the insured did not do so because the divorce would have been unlawful, by reason of the institutionalization, under the laws of the State in which the insured was domiciled at the time.

There are states where you can't divorce a hopelessly insane person?

I don't know about now, but there must have been when the rules were written (at least that's a somewhat logical deduction from the existence of the rule).

sscritic
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Re: Marriage: Is it tax-friendly?

Post by sscritic » Wed Aug 06, 2014 10:18 am

MP1233 wrote:If we knew then what we know now, we would have gotten married but continued to file as single.

That's a good trick. How do married people file as single? Is that in Publication 17?

Hint: I don't think what you suggest is legal.

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Re: Marriage: Is it tax-friendly?

Post by MP1233 » Wed Aug 06, 2014 10:24 am

sscritic wrote:
MP1233 wrote:If we knew then what we know now, we would have gotten married but continued to file as single.

That's a good trick. How do married people file as single? Is that in Publication 17?

Hint: I don't think what you suggest is legal.


Sure it is. My wife and I lived together for over a year before getting married. If we knew then what we know now, we would have had a religious ceremony, a party, or whatever was needed to cover the symbolic nature of the event and then continued to live together as we did before. What is wrong with that?

sscritic
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Re: Marriage: Is it tax-friendly?

Post by sscritic » Wed Aug 06, 2014 10:40 am

You can use your definition of "married," but when it comes to filing taxes, I use the IRS version.
Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.

If you are married according to your state law, you are married. If you are not married according to your state law, you are not married. If you are filing single, then you are not married according to your state law, you are only "married" in your mind.

The Wizard
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Re: Marriage: Is it tax-friendly?

Post by The Wizard » Wed Aug 06, 2014 10:48 am

MP1233 wrote:
...My wife and I got married when we were graduate students, and we did not make enough money to consider tax code consequences. We are now in our 50s and we both make more than $100k per year. Our marriage penalty is over $9000/year. If we knew then what we know now, we would have gotten married but continued to file as single.

You probably both have decently large retirement portfolios at this point in time then.
When the first of you passes away, there are financial ADVANTAGES to being a surviving spouse that could make up for much of the income tax "penalty" over the years.
You know that, right?
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MathWizard
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Re: Marriage: Is it tax-friendly?

Post by MathWizard » Wed Aug 06, 2014 10:54 am

In a complex tax code, there are pluses and minuses, especially if you live in a state with an income tax.

Taxes never entered my mind when I proposed.
I doubt my wife would have said yes if I they had.

MP1233
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Re: Marriage: Is it tax-friendly?

Post by MP1233 » Wed Aug 06, 2014 10:55 am

sscritic wrote:You can use your definition of "married," but when it comes to filing taxes, I use the IRS version.
Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.

If you are married according to your state law, you are married. If you are not married according to your state law, you are not married. If you are filing single, then you are not married according to your state law, you are only "married" in your mind.


I totally agree with the legal definition of marriage. However, my wife and I stay together because we are "married" in our minds. To us that is all that matters. I think this is true for many people, but of course not all. Society has evolved a lot since the 1960s, and it is quite common for parents to live their lives and raise their kids without the legal framework of marriage.

I am not a historian, but it appears to me that current tax code is based on the marriage relationship where he works and advances in his career while she stays home with the kids and provides support for her husband. This has totally changed and the tax code has not yet been changed to reflect this reality.

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Re: Marriage: Is it tax-friendly?

Post by sscritic » Wed Aug 06, 2014 10:58 am

MP1233 wrote:I am not a historian, but it appears to me that current tax code is based on the marriage relationship where he works and advances in his career while she stays home with the kids and provides support for her husband. This has totally changed and the tax code has not yet been changed to reflect this reality.

So is social security, which is why there are spousal benefits and survivor benefits, which many bogleheads take advantage of and which depend on the existence of a legal (as defined by the social security regulations) marriage at some point and for some length of time

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Re: Marriage: Is it tax-friendly?

Post by MP1233 » Wed Aug 06, 2014 11:16 am

sscritic wrote:
MP1233 wrote:I am not a historian, but it appears to me that current tax code is based on the marriage relationship where he works and advances in his career while she stays home with the kids and provides support for her husband. This has totally changed and the tax code has not yet been changed to reflect this reality.

So is social security, which is why there are spousal benefits and survivor benefits, which many bogleheads take advantage of and which depend on the existence of a legal (as defined by the social security regulations) marriage at some point and for some length of time


I agree; in some instances the code works in ones favor and in others it does not. For two career couples, which are increasingly common, the tax code often works against them. Nothing new, but it does reflect that the code has not kept up with the changes in society.

Discussion of intent of tax code as written would have to take place outside of this forum.

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Re: Marriage: Is it tax-friendly?

Post by DSInvestor » Wed Aug 06, 2014 11:22 am

g3d wrote:Please weigh in on this hypothetical (not so hypothetical) situation of mine to evaluate the tax benefits of marriage.

Take two income earners with identical salaries, let's say they each make $75k a year. If those two individuals were to file as singles, they would be taxed in the 25% bracket. But, if they were married and filing, they would be up into the 28% tax bracket. As those income earners continue to earn raises, they continue to increase their tax rate as a result of being married.


A single person with 75K salary and no other income taking std deduction and 1 exemption would have taxable income of about 65K which is in 25% tax bracket.
A couple filing jointly with 150K combined salary taking std deduction and 1 exemption would have taxable income of about 130K which is still in the 25% tax bracket.

Taxcaster 2013:
Single filer 75K salary, std deduction, 1 exemption: Taxable Income = $65,000 Fed Tax = $12,185
MFJ 150K salary, std deduction 2 exemptions: Taxable Income = 130,000 Fed Tax = $24,358 (roughly double the tax of the single filer)

The top of the 25% bracket for single filers in 2014 is 89,350 vs MFJ 148,850. If you both max out Traditional 401k, I don't think there will be much of a marriage penalty at least not for Fed taxes.

Let's increase salary to 120K
Single filer 120K salary, std deduction, 1 exemption: Taxable Income = $110,000 Fed Tax = $24,093
MFJ 240K salary, std deduction 2 exemptions: Taxable Income = 220,000 Fed Tax = $49,066

You can run more scenarios with taxcaster:
https://turbotax.intuit.com/tax-tools/c ... taxcaster/
Last edited by DSInvestor on Wed Aug 06, 2014 11:32 am, edited 1 time in total.

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Re: Marriage: Is it tax-friendly?

Post by dodecahedron » Wed Aug 06, 2014 11:31 am

g3d wrote:
dodecahedron wrote:1) I get to file MFJ for the year of his death, taking full advantage of the joint rate structure and his exemption for the year, even though he did not live all the way through it. (His income that came in after his death goes on the estate income tax return, Form 1041, instead of our joint return.)

2) Because I have a dependent young adult child (college student) and because I was eligible to file MFJ in the year of his death, I get to file as a "Qualifying Widow" for this year and next year, which gives me two years more access to the MFJ tax brackets.


Thanks for sharing, dodecahedron.

For clarification's sake, in my early 20s, the question of marriage is probably when, not if. If you have a committed partner (whom you are sharing costs with) in your early 20s, it sounds like delaying marriage a couple or five years can have a five figure financial tax implication.

Are the only realized benefits of marriage in this income situation the cost sharing?


If you are in your early 20s, you might well want to take your time--not so much for tax reasons, but to be absolutely sure that this relationship is the one you want for life.

That said, there are some benefits to marriage even for young folks:

1) One or both employers may offer cafeteria plan fringe benefits with family options that allow you and your spouse savings on combined costs for health insurance, dental insurance, vision insurance, etc.

2) Depending on your employer, there may also be other benefits for young spouses. For example, the college where I teach allows a spouse to take a free class each term. I know teachers who have earned their master's that way (our state requires new teachers to complete a master's within five years of starting their job) as well as folks who have earned MBAs part-time for little or no out-of-pocket cost. Many other colleges and universities have a similar policy. If one of you works for an airline, the spouse may get free or discounted tickets. If one of you works for the military, there are a boatload of potential spouse benefits (from shopping privileges at the PX, to a number of survivor benefits, to extra housing allowances.)

3) Auto insurance policies may cost less because insurance companies have analyzed driving records and have determined that married drivers are less risky. (Not all states permit this distinction.) In states that do allow this, discounts would be most substantial for married male drivers under 25.

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Re: Marriage: Is it tax-friendly?

Post by MP1233 » Wed Aug 06, 2014 11:37 am

The Wizard wrote:
MP1233 wrote:
...My wife and I got married when we were graduate students, and we did not make enough money to consider tax code consequences. We are now in our 50s and we both make more than $100k per year. Our marriage penalty is over $9000/year. If we knew then what we know now, we would have gotten married but continued to file as single.

You probably both have decently large retirement portfolios at this point in time then.
When the first of you passes away, there are financial ADVANTAGES to being a surviving spouse that could make up for much of the income tax "penalty" over the years.
You know that, right?


Perhaps, but perhaps not. It all depends on the circumstances. Sometimes the tax code works in your favor, sometimes it does not. My position is that it is important for each individual to be fully informed so they can make the decisions that are best for them.

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Re: Marriage: Is it tax-friendly?

Post by JW-Retired » Wed Aug 06, 2014 12:27 pm

DSInvestor wrote:
g3d wrote:Please weigh in on this hypothetical (not so hypothetical) situation of mine to evaluate the tax benefits of marriage.

Take two income earners with identical salaries, let's say they each make $75k a year. If those two individuals were to file as singles, they would be taxed in the 25% bracket. But, if they were married and filing, they would be up into the 28% tax bracket. As those income earners continue to earn raises, they continue to increase their tax rate as a result of being married.


A single person with 75K salary and no other income taking std deduction and 1 exemption would have taxable income of about 65K which is in 25% tax bracket.
A couple filing jointly with 150K combined salary taking std deduction and 1 exemption would have taxable income of about 130K which is still in the 25% tax bracket.

Taxcaster 2013:
Single filer 75K salary, std deduction, 1 exemption: Taxable Income = $65,000 Fed Tax = $12,185
MFJ 150K salary, std deduction 2 exemptions: Taxable Income = 130,000 Fed Tax = $24,358 (roughly double the tax of the single filer)

The top of the 25% bracket for single filers in 2014 is 89,350 vs MFJ 148,850. If you both max out Traditional 401k, I don't think there will be much of a marriage penalty at least not for Fed taxes.

Let's increase salary to 120K
Single filer 120K salary, std deduction, 1 exemption: Taxable Income = $110,000 Fed Tax = $24,093
MFJ 240K salary, std deduction 2 exemptions: Taxable Income = 220,000 Fed Tax = $49,066

You can run more scenarios with taxcaster:
https://turbotax.intuit.com/tax-tools/c ... taxcaster/

+1
Hopefully, OP has noticed that his/her guess about how taxes might work was wrong. Taxes are often that way. :D
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Re: Marriage: Is it tax-friendly?

Post by JasonMc » Wed Aug 06, 2014 12:57 pm

dodecahedron wrote:Here is a convenient marriage tax penalty calculator you can use:
http://taxpolicycenter.org/taxfacts/mar ... ulator.cfm


Thanks. Just found out that if my girlfriend and I got married we'd be paying $2,616 more a year in taxes, which is a big amount for us as it's 3.8% of combined AGI. Seems like a bad idea.

Person 1 AGI: $42,200
Person 2 AGI: $26,500 and claims one child and the dependent care tax credit.

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pjstack
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Re: Marriage: Is it tax-friendly?

Post by pjstack » Wed Aug 06, 2014 12:58 pm

awval999 wrote:The answer to the title of your post is "it depends".

In my personal situation where one spouse has a high income and one has a low income it is beneficial. In your situation where the spouses make identical salary it can cause a marriage tax penalty.

Also in my situation (the first example) marriage lowered my taxes and expenses.
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Re: Marriage: Is it tax-friendly?

Post by MP1233 » Wed Aug 06, 2014 1:18 pm

JasonMc wrote:
dodecahedron wrote:Here is a convenient marriage tax penalty calculator you can use:
http://taxpolicycenter.org/taxfacts/mar ... ulator.cfm


Thanks. Just found out that if my girlfriend and I got married we'd be paying $2,616 more a year in taxes, which is a big amount for us as it's 3.8% of combined AGI. Seems like a bad idea.

Person 1 AGI: $42,200
Person 2 AGI: $26,500 and claims one child and the dependent care tax credit.


Yes, the "penalty" can be very severe at the lower income levels as well as at higher levels. It is misleading to look at tax tables without looking at the phaseout schedules of different programs. In the situation you described, $2616 is a lot of money and people making so much more often cannot appreciate the severity of the increased tax hit.

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Re: Marriage: Is it tax-friendly?

Post by g3d » Wed Aug 06, 2014 1:38 pm

DSInvestor wrote:Let's increase salary to 120K
Single filer 120K salary, std deduction, 1 exemption: Taxable Income = $110,000 Fed Tax = $24,093
MFJ 240K salary, std deduction 2 exemptions: Taxable Income = 220,000 Fed Tax = $49,066

You can run more scenarios with taxcaster:
https://turbotax.intuit.com/tax-tools/c ... taxcaster/


Thanks for opening my eyes up to this. Very useful.

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Re: Marriage: Is it tax-friendly?

Post by LadyGeek » Wed Aug 06, 2014 2:50 pm

This thread is now in the Personal Finance (Not Investing) forum (taxes).
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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Re: Marriage: Is it tax-friendly?

Post by placeholder » Wed Aug 06, 2014 2:52 pm

sscritic wrote:You can use your definition of "married," but when it comes to filing taxes, I use the IRS version.
Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.

If you are married according to your state law, you are married. If you are not married according to your state law, you are not married.

Not always:
Q1. When are individuals of the same sex lawfully married for federal tax purposes?

A1. For federal tax purposes, the IRS looks to state or foreign law to determine whether individuals are married. The IRS has a general rule recognizing a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.


So a couple that is not legally married according to their state law can be married for federal purposes.
Last edited by placeholder on Wed Aug 06, 2014 4:31 pm, edited 1 time in total.

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Re: Marriage: Is it tax-friendly?

Post by YttriumNitrate » Wed Aug 06, 2014 3:11 pm

It looks like there have been several laws recently that have exacerbated the marriage penalty for high earners. Forbes Article In addition to income taxes, there can be other taxes hits for being married. For example, in Indiana a married couple living apart is only able to take one homestead exemption on their residences while the unmarried version of that same couple would be able to take two. The homestead exemption on a property can roughly cut the property taxes in half.

So far, my efforts to convince my wife that we should get divorced for tax reasons have been unsuccessful.

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Re: Marriage: Is it tax-friendly?

Post by pshonore » Wed Aug 06, 2014 3:16 pm

JasonMc wrote:
dodecahedron wrote:Here is a convenient marriage tax penalty calculator you can use:
http://taxpolicycenter.org/taxfacts/mar ... ulator.cfm


Thanks. Just found out that if my girlfriend and I got married we'd be paying $2,616 more a year in taxes, which is a big amount for us as it's 3.8% of combined AGI. Seems like a bad idea.

Person 1 AGI: $42,200
Person 2 AGI: $26,500 and claims one child and the dependent care tax credit.

Sounds like person 2 might also be eligible for EIC (Earned Income Credit). Need more facts to determine that though. Now If 1 & 2 were married their income would be too high for EIC

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Re: Marriage: Is it tax-friendly?

Post by sscritic » Wed Aug 06, 2014 3:23 pm

placeholder wrote:
sscritic wrote:If you are married according to your state law, you are married. If you are not married according to your state law, you are not married.

Not always:

Thank you for leaving out this, which was a preface to the part you quoted:
when it comes to filing taxes, I use the IRS version.

I know what IRS means. I also quoted the IRS.
Single filing status generally applies

I know what generally means.

So IRS --> generally --> "Not Always"?

Now I was responding to someone who wrote "my wife and I" which could be a same sex couple, but I made a leap that perhaps I shouldn't have. Did you read "my wife and I" as a same sex couple?

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Re: Marriage: Is it tax-friendly?

Post by Gropes & Ray » Wed Aug 06, 2014 3:34 pm

My wife and I currently pay about $50 more because of our marriage. I consider that to be a pretty great deal considering the high quality... uh, relationship stuff... that I get. :twisted:

Marriage should pay off in the tax-department if my wife stops working for a few years.

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Re: Marriage: Is it tax-friendly?

Post by denovo » Wed Aug 06, 2014 3:56 pm

If you focus solely on marginal income tax rates, it is not. But consider other financial stuff.

1. No SS survivor benefits.
2. No widow pension benefits.
3. Can't use the other person's employer-based health insurance.

I am sure there are other stuff too.

Edited to add: The exclusion of $500,000 of capital gains only goes to married couples, I believe.
Last edited by denovo on Wed Aug 06, 2014 4:13 pm, edited 1 time in total.

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Re: Marriage: Is it tax-friendly?

Post by Globalviewer58 » Wed Aug 06, 2014 4:10 pm

When my partner first asked about marriage I replied that the taxes would be prohibitive for both of us. Although she earned her CPA years before we met she had not calculated the tax penalty for our situation. Once enlightened, she declined to pay the $18K tax penalty for the pleasure of calling herself Mrs. Satisfied with the lovely engagement ring she wears, she can now laugh when recalling her initial reaction to my reply. The best part is that she is now a Boglehead at heart.

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Re: Marriage: Is it tax-friendly?

Post by MP1233 » Wed Aug 06, 2014 4:14 pm

denovo wrote:If you focus solely on marginal income tax rates, it is not. But consider other financial stuff.

1. No SS survivor benefits.
2. No widow pension benefits.
3. Can't use the other person's employer-based health insurance.

I am sure there are other stuff too.


These are entirely valid points, but my position is that you have to look at all the significant factors in play for each couple. This can make the calculations complex. Sometimes marriage makes financial sense and sometimes it does not. One can also envision situations where it is of benefit at certain periods of life and detrimental at others. I understand how social norms can instill preconceived concepts of what is acceptable and what is not. However, the world is changing and one must adapt. So IMO the most accurate answer to the question is "it depends."

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Re: Marriage: Is it tax-friendly?

Post by denovo » Wed Aug 06, 2014 4:24 pm

MP1233 wrote:
denovo wrote:If you focus solely on marginal income tax rates, it is not. But consider other financial stuff.

1. No SS survivor benefits.
2. No widow pension benefits.
3. Can't use the other person's employer-based health insurance.

I am sure there are other stuff too.


These are entirely valid points, but my position is that you have to look at all the significant factors in play for each couple. This can make the calculations complex. Sometimes marriage makes financial sense and sometimes it does not. One can also envision situations where it is of benefit at certain periods of life and detrimental at others. I understand how social norms can instill preconceived concepts of what is acceptable and what is not. However, the world is changing and one must adapt. So IMO the most accurate answer to the question is "it depends."


Social Security is going to be in the cards for all of us, right ? And yes let's please stay away from discussions about solvency. Oh, and I also added and edited that post, consider the exclusion for capital gains on home sales.

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Re: Marriage: Is it tax-friendly?

Post by placeholder » Wed Aug 06, 2014 4:27 pm

sscritic wrote:Thank you for leaving out this, which was a preface to the part you quote:

As you seem to think it important I have updated my post to include that quote.
I know what generally means.
So IRS --> generally --> "Not Always"?

Without seeing the original of what you quoted it's difficult to say but at any rate you turned it into an incorrect definitive and we as KNOW how important you consider it to get things exactly right I'm sure that you are actually grateful for the correction regardless of how your post might be coming off.

Now I was responding to someone who wrote "my wife and I" which could be a same sex couple, but I made a leap that perhaps I shouldn't have. Did you read "my wife and I" as a same sex couple?

I was of course not responding to the OP but to information in your post so I did not need to make an assumption at all.
Last edited by placeholder on Wed Aug 06, 2014 4:41 pm, edited 2 times in total.

tj
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Re: Marriage: Is it tax-friendly?

Post by tj » Wed Aug 06, 2014 4:30 pm

denovo wrote:If you focus solely on marginal income tax rates, it is not. But consider other financial stuff.

1. No SS survivor benefits.
2. No widow pension benefits.
3. Can't use the other person's employer-based health insurance.

I am sure there are other stuff too.

Edited to add: The exclusion of $500,000 of capital gains only goes to married couples, I believe.



It's 250,000 per person. If two people jointly own a home, they each get their exclusion. It shouldn't matter if you are married or not.

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Re: Marriage: Is it tax-friendly?

Post by Boglegrappler » Wed Aug 06, 2014 4:37 pm

One benefit of being married is that you can leave all of your assets to that person and they won't be subject to estate taxes until that person dies. There are some recent examples of screw-ups with respect to this issue.

http://www.forbes.com/sites/robertwood/ ... tate-plan/

It doesn't matter unless you have earned enough to have saved over $5 million (the amount of the estate tax exemption currently) , but if you have, it matters in a big way. I read a newspaper article that makes me think that the Seymour Hoffman estate will probably claim to have been common law marriage partners. Its an interesting question with respect to the earlier post about not formalizing marriage. That's a possibility for people and could lead to the government pursuing people for common-law married status.

The bottom line is that the tax code is currently set up to tax groups (households) and not individuals. That's what gives rise to the marriage penalty. But its a significant hit to two equal earners.

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Re: Marriage: Is it tax-friendly?

Post by Meg77 » Wed Aug 06, 2014 4:43 pm

I expected a large marriage tax penalty when I got married this year because both me and my husband earn in the low 6 figures. However my projections were only taking into account our single life deductions - my small condo had low interest and tax deductions, he rented; I maxed out a Roth 401k, he contributed less than the max etc.

Once we were married we changed our lifestyle and circumstances according to our new joint income - and it turns out we will pay slightly less in taxes this year than we each did combined last year (my bonus was a bit smaller though which contributes to that somewhat). On our married income, we were able to afford a townhome with much larger interest and property tax deductions, although we pay the same in total housing costs as we did combined when we were single. I switched to a traditional 401k since it makes more sense now that our tax bracket is higher, and we can afford to max out two traditional 401ks and an HSA now, which lowers our taxable income tremendously - and is more in total savings than we each could do on our own. We haven't even gotten to child tax credits etc.

Bottom line is that our financial lives are WAY better together than they were separately, despite a few grand in a marriage tax penalty that I expect will happen generally. We can afford to save more, we get to pick the best of two health insurance plans, housing savings are huge (although instead of saving we basically live in a place 5 times as nice as we used to individually, but we could have stayed in my old condo and pocketed what he used to pay in rent and utilities). But there are other savings as well: the cost savings of going out less, buying more groceries (makes more sense than cooking for one once you have a partner), etc. You'd be surprised how that kind of thing adds up. One Netflix subscription, a family cell plan, cheaper insurance, etc.

Bottom line - this isn't something to worry about yet. Tax laws have a way of changing anyway. Plus you are single and who knows what your future joint income would even be. Bottom line - more income = better. It's kind of like capital gains. Having more means higher taxes, but isn't that still a good thing? Would you rather if your future spouse made half what you make in order to lower your tax bracket?
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Re: Marriage: Is it tax-friendly?

Post by JasonMc » Thu Aug 07, 2014 8:26 am

pshonore wrote:
JasonMc wrote:
dodecahedron wrote:Here is a convenient marriage tax penalty calculator you can use:
http://taxpolicycenter.org/taxfacts/mar ... ulator.cfm


Thanks. Just found out that if my girlfriend and I got married we'd be paying $2,616 more a year in taxes, which is a big amount for us as it's 3.8% of combined AGI. Seems like a bad idea.

Person 1 AGI: $42,200
Person 2 AGI: $26,500 and claims one child and the dependent care tax credit.

Sounds like person 2 might also be eligible for EIC (Earned Income Credit). Need more facts to determine that though. Now If 1 & 2 were married their income would be too high for EIC

You are correct. That is why person 2 claims the child, because of the greater tax benefit of the EIC. There would be no EIC if the incomes were combined through marriage.

There's also the ACA subsidy to consider, although we don't have insurance through it. I don't know the numbers, but I think person 2 would get a considerable subsidy, while the married couple would get no subsidy or very little subsidy.

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Re: Marriage: Is it tax-friendly?

Post by pshonore » Thu Aug 07, 2014 8:33 am

JasonMc wrote:
pshonore wrote:
JasonMc wrote:
dodecahedron wrote:Here is a convenient marriage tax penalty calculator you can use:
http://taxpolicycenter.org/taxfacts/mar ... ulator.cfm


Thanks. Just found out that if my girlfriend and I got married we'd be paying $2,616 more a year in taxes, which is a big amount for us as it's 3.8% of combined AGI. Seems like a bad idea.

Person 1 AGI: $42,200
Person 2 AGI: $26,500 and claims one child and the dependent care tax credit.

Sounds like person 2 might also be eligible for EIC (Earned Income Credit). Need more facts to determine that though. Now If 1 & 2 were married their income would be too high for EIC

You are correct. That is why person 2 claims the child, because of the greater tax benefit of the EIC. There would be no EIC if the incomes were combined through marriage.

There's also the ACA subsidy to consider, although we don't have insurance through it. I don't know the numbers, but I think person 2 would get a considerable subsidy, while the married couple would get no subsidy or very little subsidy.
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