Tax bill split between spouses

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Topic Author
DreamsOfRetiring
Posts: 65
Joined: Sat Nov 23, 2019 9:42 am

Tax bill split between spouses

Post by DreamsOfRetiring »

This is a bit controversial. My spouse and I keep our financial accounts separate. We agreed to keep things separate so we both have practice maintaining our own finances and investments. We are open about money discussions, and we co-own all large assets. Our income ratio is 4:1 ( me:her), so for any large expense we split it in that ratio.

The controversial part is splitting tax bills. Whats an equitable split of taxes? Please dont take this to mean I am trying to get my spouse to pay , but just theoretically has anyone approached the math?

Here are the numbers:
2020 - Income ~ 500K ( 4:1 ) W2s
Rough tax bill - Fed + State = 150K

Marginal Fed - 35%

Her withheld ~ 12K
Mine withheld ~ 138K
MrJedi
Posts: 624
Joined: Wed May 06, 2020 11:42 am

Re: Tax bill split between spouses

Post by MrJedi »

Seems like you should first estimate tax liabilities if you were filing single.

If you are filing jointly, this typically lowers the tax liability compared to just adding the two singles together. Maybe you can take the overall tax savings produced by filing jointly and split it by your 4:1 ratio.
crre
Posts: 64
Joined: Fri Apr 12, 2019 8:07 pm

Re: Tax bill split between spouses

Post by crre »

i have to admit i find this question bizarre, but then again i've been married forever and our finances have been joint from day one. what do you mean by equitable? if you keep things separate only so that you both have practice maintaining your own finances then what does it matter? however, i see at least two options:

1. split 4:1 as with other large expenses
2. split according to the tax resulting from each income. presumably this will result in you paying more than 1/5

the amount withheld is irrelevant.
HornedToad
Posts: 1039
Joined: Wed May 21, 2008 12:36 am

Re: Tax bill split between spouses

Post by HornedToad »

The tax code is progressive, so 4:1 isn’t fair to her.

Calculate what you would each owe independently, then see what you owe together and adjust. It very well could be you’d owe 140k and her 30k but MFJ brings it down to 150k and you can split the savings in half from being married. Otherwise you would proportionately benefit more from being married than she would
oldfatguy
Posts: 900
Joined: Tue Feb 27, 2018 1:38 pm

Re: Tax bill split between spouses

Post by oldfatguy »

HornedToad wrote: Wed Apr 07, 2021 8:59 am The tax code is progressive, so 4:1 isn’t fair to her.

Calculate what you would each owe independently, then see what you owe together and adjust. It very well could be you’d owe 140k and her 30k but MFJ brings it down to 150k and you can split the savings in half from being married. Otherwise you would proportionately benefit more from being married than she would
+1

Was just about to write almost exactly the same thing.
User avatar
ResearchMed
Posts: 11417
Joined: Fri Dec 26, 2008 11:25 pm

Re: Tax bill split between spouses

Post by ResearchMed »

I'd recommend that you first figure out what the least amount of taxes that you can (legally!) owe. That's probably going to MFJ.

Then... perhaps allocate that amount proportionately. This might be that 4:1 ratio that you have both agreed to.

ETA: I'd like to edit, based upon reading some of the subsequent comments.The lower earner should probably not pay more than would have been paid if filing single.
My "goal" was that the "savings" should be split, not that the lower earner should be paying more than if filing single.

RM
Last edited by ResearchMed on Wed Apr 07, 2021 9:27 am, edited 1 time in total.
This signature is a placebo. You are in the control group.
protagonist
Posts: 6992
Joined: Sun Dec 26, 2010 12:47 pm

Re: Tax bill split between spouses

Post by protagonist »

DreamsOfRetiring wrote: Wed Apr 07, 2021 8:44 am
The controversial part is splitting tax bills. Whats an equitable split of taxes? Please dont take this to mean I am trying to get my spouse to pay , but just theoretically has anyone approached the math?

I'm sticking my neck out in responding to this, but I would think what is "equitable" in a marriage boils down to what the two partners agree upon, since every marriage is different. In a healthy marriage two partners should be able to come to some sort of agreement about how to handle finances. Maybe the "math" would have you dividing things proportionate to your individual financial contribution, but then you could get into other issues, like how much does each partner contribute in labor to home maintenance projects, child care, cleaning, cooking, bill paying, etc...how should those things be factored in? In other words, it is a rabbit hole. For most people a marriage is more than just a business arrangement.

My advice....talk about it together, try to work it out and come to an agreement you are both satisfied with. If that is impossible, maybe therapy. One person dictating to the other what is equitable (based on math or based on what people in an online investment forum think) will likely not bode well.
Gill
Posts: 7226
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Tax bill split between spouses

Post by Gill »

How about if she only contributes the amount of her withholding? That would likely approximate her equitable share.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
HomeStretch
Posts: 6073
Joined: Thu Dec 27, 2018 3:06 pm

Re: Tax bill split between spouses

Post by HomeStretch »

How to split fairly seems to be something you and spouse need to work out. It is more than just a mathematical exercise (see Items 3. - 5., below).

The options can range from:
1. Split 50-50.
2. Split 4:1 based on your individual gross income
3. The higher earner pays more than 80%. A 4:1 gross income ratio gives the high earner much more disposable income (and funds available for retirement savings) after paying necessities than the low earner.
4. The higher earner pays more than 80% (4:1) if the low earner is providing more time managing the shared household and/or childcare responsibilities. There’s no reason the low earner should not be “paid” for these valuable 2nd/3rd jobs.
5. Do some sort of split after calculating the net income ratio. ‘Net Income’ equal retirement contribution $ by both spouses. Assuming you both want to retire at the same time and have an equal standard of living in retirement.
6. Etc.
Last edited by HomeStretch on Wed Apr 07, 2021 9:17 am, edited 2 times in total.
flyfishers83
Posts: 96
Joined: Fri Jun 07, 2019 6:08 pm

Re: Tax bill split between spouses

Post by flyfishers83 »

This could get really complicated if you have income from investments. I'd probably not try to go very far down that rabbit hole.

I also wouldn't try to put a whole lot of precision to this. Presumably you both enjoy some benefits from the other's income, even with the disparity. You get the benefit of MFJ, and I assume your lifestyle is heavily subsidized by your significant income. In some ways, it will be an arbitrary determination-though I would be wary about giving your spouse a hefty bill. If that's the way you're going to approach, you should probably look at manipulating tax withholdings on the front end.
DoTheMath
Posts: 456
Joined: Sat Jul 04, 2015 1:11 pm
Location: The Plains

Re: Tax bill split between spouses

Post by DoTheMath »

As others have said, this seems pretty straightforward mathematically. You can run the taxes as if you were to file independently, and as married, and split the difference. When calculating the difference, be sure to take into account any unintended consequences (e.g., maybe the lower income earner is no longer eligible for an IRA, or covid stimulus, or...).

An appropriate split of the difference is a relationship issue.

Obviously the lower earning spouse should expect to pay no more than what they would pay under filing independently. But they should really share in the financial gain of filing jointly. The easiest and most direct option is to split the tax savings 50-50. The high earning person could say that is unfair, but in my opinion everybody wins and nobody should complain. Probably the other extreme would be to split the tax savings 4-1 since that's what you use for other big financial expenses. But if I'm the low earning person I'm going to feel like that's unfair.

Another option would be to set aside the tax savings for a joint purchase that both will enjoy (say, a vacation). Then you don't have to get into the nitty-gritty of numbers.


P.S. Ignore the neigh-sayers who judge how you and your SO handle your money. As long as you both are genuinely satisfied with how it works for you, it is irrelevant what others do or think you should do.
“I am losing precious days. I am degenerating into a machine for making money. I am learning nothing in this trivial world of men. I must break away and get out into the mountains...” -- John Muir
bltn
Posts: 1099
Joined: Mon Feb 20, 2017 9:32 pm

Re: Tax bill split between spouses

Post by bltn »

Gill wrote: Wed Apr 07, 2021 9:07 am How about if she only contributes the amount of her withholding? That would likely approximate her equitable share.
Gill
I agree. If the withholding is right, then those are the right ratio amounts to be paid, given the progressive nature of the taxes.
User avatar
Nate79
Posts: 6973
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Tax bill split between spouses

Post by Nate79 »

DreamsOfRetiring wrote: Wed Apr 07, 2021 8:44 am This is a bit controversial. My spouse and I keep our financial accounts separate. We agreed to keep things separate so we both have practice maintaining our own finances and investments. We are open about money discussions, and we co-own all large assets. Our income ratio is 4:1 ( me:her), so for any large expense we split it in that ratio.

The controversial part is splitting tax bills. Whats an equitable split of taxes? Please dont take this to mean I am trying to get my spouse to pay , but just theoretically has anyone approached the math?

Here are the numbers:
2020 - Income ~ 500K ( 4:1 ) W2s
Rough tax bill - Fed + State = 150K

Marginal Fed - 35%

Her withheld ~ 12K
Mine withheld ~ 138K
Why are you asking? Is there something behind the question - meaning one of the two of you is not happy with whatever way you have been doing it before?
protagonist
Posts: 6992
Joined: Sun Dec 26, 2010 12:47 pm

Re: Tax bill split between spouses

Post by protagonist »

OP....This may be helpful. There are some really good advice points.
https://www.cnbc.com/2019/09/30/people- ... ality.html
Topic Author
DreamsOfRetiring
Posts: 65
Joined: Sat Nov 23, 2019 9:42 am

Re: Tax bill split between spouses

Post by DreamsOfRetiring »

thanks for all the responses.

This is not a contentious issue b/w me and my spouse.. no relationship issues stem from this.
There is good chance that we keep things exactly as they are.

.. and as all have mentioned... spitting taxes in ratio of income would be ludicrous, given that taxes are progressive.
Topic Author
DreamsOfRetiring
Posts: 65
Joined: Sat Nov 23, 2019 9:42 am

Re: Tax bill split between spouses

Post by DreamsOfRetiring »

Nate79 wrote: Wed Apr 07, 2021 9:32 am
Why are you asking? Is there something behind the question - meaning one of the two of you is not happy with whatever way you have been doing it before?
Last year I asked her to pay 1K more than her withholding amount. This year the same... I was just thinking IF there is even a way to figure it out. Mostly curiosity.
LongRoad
Posts: 152
Joined: Mon Dec 31, 2018 2:00 pm

Re: Tax bill split between spouses

Post by LongRoad »

bltn wrote: Wed Apr 07, 2021 9:20 am
Gill wrote: Wed Apr 07, 2021 9:07 am How about if she only contributes the amount of her withholding? That would likely approximate her equitable share.
Gill
I agree. If the withholding is right, then those are the right ratio amounts to be paid, given the progressive nature of the taxes.
The problem is that 'math' won't answer the question about equity, but this comes closest I believe since income tax rates are intentionally progressive.

OTOH, once taxes (which are a non-discretionary and prior obligation over any other household expenses) are accounted for, perhaps your real after-tax income ratio is closer to 3:1?
humblecoder
Posts: 503
Joined: Thu Aug 06, 2020 8:46 am

Re: Tax bill split between spouses

Post by humblecoder »

My wife is self-employed, but I am not. I'll withhold an amount from my paycheck, and then she makes quarterly payments based upon her business income. Her income is pretty predictable, so we generally know what the quarterly payments should be. I end up withholding a little more than I normally would, but that's just to ease her pain a bit. It wasn't based upon any mathematically fair formula.

As background, we have separate bank accounts for day-to-day spending, and the combined accounts for savings and taxable investments. We don't split expenses as precisely as you, though. If it is more convenient for me to pay something, I'll pay it. And vice versa. For instance, if she is out grocery shopping, she'll put it on her card. She doesn't give me the receipt and ask for reimbursement or anything like that.

Over time, we've sort of decided which bills I'll pay and which ones she'll pay. For big purchases or other unusual circumstances, we'll have a meeting of the minds to see how we want to fit it into our combined budget. The key thing is that we make sure that neither of us carries any credit card debt. So if she put, say, a plumbing bill on her card since she happened to be home at the time, and it blows out her budget, I'll either give her the money from my account or we'll pull it from our joint emergency savings account.
bsteiner
Posts: 5676
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Tax bill split between spouses

Post by bsteiner »

See Treas. Reg. § 20.2053-6(f): https://www.law.cornell.edu/cfr/text/26/20.2053-6. You figure what each spouse's tax would have been if they filed separate returns, and then you prorate the tax on the joint return in the same proportion.

This came up more often before 1982, when the estate tax marital deduction was generally limited to 50% of the estate, and you more often had to calculate the deceased spouse's share of the income tax for the year of death. It sometimes comes up in second marriages where the deceased spouse's estate goes to persons other than the surviving spouse. It also occasionally comes up when one spouse wants to file an amended return to claim a refund.
Topic Author
DreamsOfRetiring
Posts: 65
Joined: Sat Nov 23, 2019 9:42 am

Re: Tax bill split between spouses

Post by DreamsOfRetiring »

We split expenses informally. 4:1 is a guideline for property tax split. The rest is mostly winging it.
humblecoder wrote: Wed Apr 07, 2021 9:38 am My wife is self-employed, but I am not. I'll withhold an amount from my paycheck, and then she makes quarterly payments based upon her business income. Her income is pretty predictable, so we generally know what the quarterly payments should be. I end up withholding a little more than I normally would, but that's just to ease her pain a bit. It wasn't based upon any mathematically fair formula.

As background, we have separate bank accounts for day-to-day spending, and the combined accounts for savings and taxable investments. We don't split expenses as precisely as you, though. If it is more convenient for me to pay something, I'll pay it. And vice versa. For instance, if she is out grocery shopping, she'll put it on her card. She doesn't give me the receipt and ask for reimbursement or anything like that.

Over time, we've sort of decided which bills I'll pay and which ones she'll pay. For big purchases or other unusual circumstances, we'll have a meeting of the minds to see how we want to fit it into our combined budget. The key thing is that we make sure that neither of us carries any credit card debt. So if she put, say, a plumbing bill on her card since she happened to be home at the time, and it blows out her budget, I'll either give her the money from my account or we'll pull it from our joint emergency savings account.
delamer
Posts: 11091
Joined: Tue Feb 08, 2011 6:13 pm

Re: Tax bill split between spouses

Post by delamer »

Your wife proportionally pays a much higher percentage of her income toward Social Security taxes than you do, due to the earnings cap.

Maybe you should take that into account when splitting the income tax bill?
User avatar
ClevrChico
Posts: 2012
Joined: Tue Apr 03, 2012 8:24 pm

Re: Tax bill split between spouses

Post by ClevrChico »

I use "Excel 1040" to calculate the individual tax:

https://sites.google.com/view/incometaxspreadsheet/home

I input each spouse as married file separately and divide credits and deductions 50/50 to apportion each spouse's tax. (Excel 1040 has a nice override option to force it to this.)

It takes about 15 minutes to do and seems like the fair approach.
Last edited by ClevrChico on Wed Apr 07, 2021 11:59 am, edited 2 times in total.
User avatar
SmileyFace
Posts: 6365
Joined: Wed Feb 19, 2014 10:11 am

Re: Tax bill split between spouses

Post by SmileyFace »

With a 4:1 ratio the easiest and perhaps most equitable way to do it would be for the high income earner to pay ALL the taxes. At least this is my opinion for a couple that doesn't fully combine assets/earnings and has such income unequity.
We have always combined all money and for 20 years have had a 1:0 ratio so really hard to wrap my head around your question.
Hyperchicken
Posts: 713
Joined: Mon Mar 02, 2020 5:33 pm

Re: Tax bill split between spouses

Post by Hyperchicken »

I'm thinking the only clean way to split the tax bill is to file MFS.

Then every spouse figures their own tax liability, amount withheld, and the amount due.

If you want to file MFJ, there's not going to be a clean separation, but the closest that I can think of is this:

1) Estimate tax liability as if you were filing MFS. For example, with 400K + 100K income, that would be 107K + 15K.
2) Estimate MFJ tax liability. For 500K income, that is 115K.
3) Pro-rate MFJ tax liability using MFS tax liability: 115 * 107 / (107 + 15) = 101K, 115 * 15 / (107 + 15) = 14K.

Note the result isn't too different compared to just filing MFS.
Lee_WSP
Posts: 4245
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Tax bill split between spouses

Post by Lee_WSP »

If you don't want to read the code, this is the relevant formula:
separate tax ÷ Both separate taxes × Joint tax
So, you'd each calculate your separate tax, take the separate tax in dispute, divide that by both separate taxes and then you get the percentage of tax liability which you can then multiply against the total tax bill.
Point
Posts: 329
Joined: Mon Jul 10, 2017 9:33 pm

Re: Tax bill split between spouses

Post by Point »

It may not be what you want to hear, but the prior commenters have pretty much covered the waterfront. Make a decision.

I would ask myself, in your situation, if this was symptomatic of a larger issue: long term financial stability for you both. Are you both covered for insurance, long term debts (term life), retirement 25-50x annual spend, etc? Or, are these joint liabilities funded individually and if so, are there holes in the plan?
citygirldc
Posts: 5
Joined: Tue Aug 11, 2020 1:51 pm

Re: Tax bill split between spouses

Post by citygirldc »

HomeStretch wrote: Wed Apr 07, 2021 9:08 am 3. The higher earner pays more than 80%. A 4:1 gross income ratio gives the high earner much more disposable income (and funds available for retirement savings) after paying necessities than the low earner.
This one is key to me. We married in our 40s and preferred to keep managing our own finances. Until last year, we made roughly equal incomes. Last year, my partner accepted a lower paying but more fulfilling job. At first I planned for us just to split expenses in proportion to income, but when I did the math I saw that was totally unfair. I would end up with a lot more discretionary income than him, even though the split was technically "fair." So instead I split our expenses so that we both end up with the same amount of money leftover from our paychecks (so I guess a variation on the "allowance" concept, but with a focus on joint expenses versus the allowance amount). I did not want to have a different lifestyle than my spouse--that seemed a bit preposterous to me. It's also a good way to ease into the idea of "our" money for retirement in a decade or so, as I have proportionally more retirement savings so will continue to fund our lifestyle at a higher rate. The disproportionate split made my partner uncomfortable for a bit, but he has grown to accept it.
Broken Man 1999
Posts: 6008
Joined: Wed Apr 08, 2015 11:31 am
Location: West coast of Florida, inland on high ground!

Re: Tax bill split between spouses

Post by Broken Man 1999 »

My income has always been much higher, as DW dropped out of the workforce early in her career to be a SAHM for years. A joint decision we both wanted.

In retirement, my SS is double DW's. Her career was shorter also because she retired at age 55.

We maintain individual accounts, we had a joint account many years ago when we had a mortgage. No mortgage, no need for a joint account.

Today I pay the bulk of expenses, including taxes. It isn't a science, splitting things up. It truth, DW has more disposable income than I take for myself, and I am 100% OK with that. So long as there are groceries in the house, gas in the van, and the cell bill is paid, she is golden.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
Topic Author
DreamsOfRetiring
Posts: 65
Joined: Sat Nov 23, 2019 9:42 am

Re: Tax bill split between spouses

Post by DreamsOfRetiring »

I am not advocating for different lifestyle at all. In fact my spouse has for eg. a much nicer car..
We make decisions jointly on any purchase. the autonomy we have is largely for things in the less than $100 bucket.

But nonetheless, it is good for me to learn how others in my situation view money. I certainly dont think of it as my money vs her money despite the fact they are in separate accounts.

perhaps its naive, but I advocated separate accounts to help with her desire to learn financial good practices. She is now investing on her own for e.g. and keeping track of our / hers expenses. We live far below our means and save aggressively, we have common goals and interests.

As someone said, technically I have far more disposable income. But I dont see it as mine alone. We save for our future together etc.
sailaway
Posts: 3017
Joined: Fri May 12, 2017 1:11 pm

Re: Tax bill split between spouses

Post by sailaway »

I would just consider the taxes owed (or refund) as the bill and split that according to the normal ratio.
User avatar
TimeRunner
Posts: 1653
Joined: Sat Dec 29, 2012 9:23 pm
Location: Quaint Seaside, CA

Re: Tax bill split between spouses

Post by TimeRunner »

Hey OP, Don't worry about it. We do the same thing, according to the BSteiner post upthread. It's not hard to do in Turbotax (download version) for the primary taxpayer. It's more of a PITA for the secondary taxpayer. Prepare the joint return (Fed and State) first. Make a couple of file copies. Open a copy with a new filename, change the MFJ to single taxpayer, then switch to forms mode and delete all the forms related to the secondary taxpayer. There will be a couple of places you'll need to edit and double check, but this works pretty quickly for Fed and State. This is now the mock return for the primary taxpayer. For the secondary taxpayer, I found that it's faster to just enter the secondary taxpayer as a new mock single return, in order to get that number for tax year 1. Keep a copy of that mock return, and the following year, carry that mock return into year 2 and update it again for the secondary taxpayer. Use a simple spreadsheet to document the joint Fed/State return numbers, the two mock single returns, then the ratio you apply to calculate each person's share of the real joint return. Copy and update that each year.

I'm retired and have a decent pension. My spouse still works part-time. I share my pension with her according to how much she works part-time. (The more she works, the less of my pension she gets. If she retires, we'll split my pension 50/50.) I also credit her share of pension fed/state tax withholding towards her share of our MFJ tax return, per above process. I also pay 2/3 of the mortgage (since I made more in the day), and used to take 2/3 of the mortgage deduction, but since we live in a blue state, we fall under the standard deduction now.

I'm sure this seems strange to some folks, but if you've been married twice and value some financial control over your own assets, you'll get it. If not, that's OK too. :sharebeer
One cannot enlighten the unconscious.
Topic Author
DreamsOfRetiring
Posts: 65
Joined: Sat Nov 23, 2019 9:42 am

Re: Tax bill split between spouses

Post by DreamsOfRetiring »

sailaway wrote: Wed Apr 07, 2021 1:15 pm I would just consider the taxes owed (or refund) as the bill and split that according to the normal ratio.
that, as others have pointed out, is unfair to the lower earning spouse... since in reality MFS would yield a tax bill roughly in the ratio of 10:1 compared to a earnings ratio go 4:1...
Topic Author
DreamsOfRetiring
Posts: 65
Joined: Sat Nov 23, 2019 9:42 am

Re: Tax bill split between spouses

Post by DreamsOfRetiring »

TimeRunner wrote: Wed Apr 07, 2021 1:37 pm Hey OP, Don't worry about it. We do the same thing, according to the BSteiner post upthread. It's not hard to do in Turbotax (download version) for the primary taxpayer. It's more of a PITA for the secondary taxpayer. Prepare the joint return (Fed and State) first. Make a couple of file copies. Open a copy with a new filename, change the MFJ to single taxpayer, then switch to forms mode and delete all the forms related to the secondary taxpayer. There will be a couple of places you'll need to edit and double check, but this works pretty quickly for Fed and State. This is now the mock return for the primary taxpayer. For the secondary taxpayer, I found that it's faster to just enter the secondary taxpayer as a new mock single return, in order to get that number for tax year 1. Keep a copy of that mock return, and the following year, carry that mock return into year 2 and update it again for the secondary taxpayer. Use a simple spreadsheet to document the joint Fed/State return numbers, the two mock single returns, then the ratio you apply to calculate each person's share of the real joint return. Copy and update that each year.

I'm retired and have a decent pension. My spouse still works part-time. I share my pension with her according to how much she works part-time. (The more she works, the less of my pension she gets. If she retires, we'll split my pension 50/50.) I also credit her share of pension fed/state tax withholding towards her share of our MFJ tax return, per above process. I also pay 2/3 of the mortgage (since I made more in the day), and used to take 2/3 of the mortgage deduction, but since we live in a blue state, we fall under the standard deduction now.

I'm sure this seems strange to some folks, but if you've been married twice and value some financial control over your own assets, you'll get it. If not, that's OK too. :sharebeer
amen !!
phxjcc
Posts: 830
Joined: Thu Aug 23, 2018 3:47 pm

Re: Tax bill split between spouses

Post by phxjcc »

oldfatguy wrote: Wed Apr 07, 2021 9:00 am
HornedToad wrote: Wed Apr 07, 2021 8:59 am The tax code is progressive, so 4:1 isn’t fair to her.

Calculate what you would each owe independently, then see what you owe together and adjust. It very well could be you’d owe 140k and her 30k but MFJ brings it down to 150k and you can split the savings in half from being married. Otherwise you would proportionately benefit more from being married than she would
+1

Was just about to write almost exactly the same thing.
^^^This.
If she was filing single she may get a refund.
sailaway
Posts: 3017
Joined: Fri May 12, 2017 1:11 pm

Re: Tax bill split between spouses

Post by sailaway »

DreamsOfRetiring wrote: Wed Apr 07, 2021 1:38 pm
sailaway wrote: Wed Apr 07, 2021 1:15 pm I would just consider the taxes owed (or refund) as the bill and split that according to the normal ratio.
that, as others have pointed out, is unfair to the lower earning spouse... since in reality MFS would yield a tax bill roughly in the ratio of 10:1 compared to a earnings ratio go 4:1...
In this case, the higher earner had a much higher withholding, much more than 4x the lower earner and very close to your 10:1 ratio. Taxes owed (vs the tax liability) should be a relatively small amount that can be split equitably.
Topic Author
DreamsOfRetiring
Posts: 65
Joined: Sat Nov 23, 2019 9:42 am

Re: Tax bill split between spouses

Post by DreamsOfRetiring »

yes... this is somewhat academic for me..
User avatar
celia
Posts: 12394
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Tax bill split between spouses

Post by celia »

We have joint assets and our pensions and SS are considered joint (since the contributions while working were from family (joint) income and the surviving spouse will benefit). We each also have separate trusts holding inherited assets from our own extended families.

First I put the joint assets into tax software and write down the tax liability (not how much is still owed or refund which is irrelavent). I save the file, then use that for a basis for adding my income only. Then I use the joint data and add his separate income only. Then there is the final tax return with joint, his, and hers. Our trust lawyer said we should be paying the taxes owed due to separate money from the separate money. Although we usually have enough withholding from joint money, we don’t always withdraw taxes from separate money. But we try to make the tax payments, including where the withholding came from, proportional. The withholdings should be applied to the tax liability caused by each person.
User avatar
celia
Posts: 12394
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Tax bill split between spouses

Post by celia »

I haven’t yet figured out what to do in this situation, so comments are requested.

My dad was widowed twice and he and third wife have always kept their money separate for inheritance reasons. They lived in his paid off house until late last year when they were both moved to assisted living. (She never paid for home repairs, property tax, or utilities.) To cover their expenses, the house was sold in January 2021 (for over a $500 profit). Let’s say dad had a LTC carryover loss of $100k and they haven’t owed any taxes for a few years so $3k gets used up each year.***. To pay for her share of assisted living expenses, her stocks were liquidated last year for a $40K LTCG. So for 2020, they don’t owe any taxes because she used up $40k of his $100k carryover losses on a joint return.

Since the house was sold this year, after medical expenses (which may or may not be equal for them) and $500 exemption on the house sale, say they owe taxes on his $100K LTCG due to the house sale. How should the tax bill be split between them?


*** separate question regarding the $3,000 LT Capital Loss that is used up each year: if they have $0 tax liability before the loss is applied, do they still lose $3,000 of LTC loss each year (although it is not needed)?
123
Posts: 7097
Joined: Fri Oct 12, 2012 3:55 pm

Re: Tax bill split between spouses

Post by 123 »

Marriage is about equal sharing, so share the tax brackets as they are.

Calculate your taxes 2 times.

First time calculate the total tax due based on her income times two (you both are equally sharing the lower tax brackets). She is liable for half of the total tax under that calculation. That half of the total tax is her tax "liability". Between yourselves apply any correction for taxes that she had withheld.

Second time calculate the total tax in the regular manner. The amount that the he owes is the difference between total tax calculated in the regular manner and her "liability" as calculated in the preceding step.
The closest helping hand is at the end of your own arm.
drzzzzz
Posts: 639
Joined: Sat Sep 22, 2012 9:56 pm

Re: Tax bill split between spouses

Post by drzzzzz »

This will likely sound inappropriate. We too split taxes, since the bulk of our prior income and almost all of our accounts are separate. However, we don't bother to calculate how much either of us should pay, but just generally agree to split in a way that we think makes sense and works for us. Based upon your income, why are spending this much time on the question - especially since in the past you have only asked her to contribute an additional $1000? Is it worth all the fuss?
KlangFool
Posts: 20139
Joined: Sat Oct 11, 2008 12:35 pm

Re: Tax bill split between spouses

Post by KlangFool »

protagonist wrote: Wed Apr 07, 2021 9:06 am
DreamsOfRetiring wrote: Wed Apr 07, 2021 8:44 am
The controversial part is splitting tax bills. Whats an equitable split of taxes? Please dont take this to mean I am trying to get my spouse to pay , but just theoretically has anyone approached the math?

I'm sticking my neck out in responding to this, but I would think what is "equitable" in a marriage boils down to what the two partners agree upon, since every marriage is different. In a healthy marriage two partners should be able to come to some sort of agreement about how to handle finances. Maybe the "math" would have you dividing things proportionate to your individual financial contribution, but then you could get into other issues, like how much does each partner contribute in labor to home maintenance projects, child care, cleaning, cooking, bill paying, etc...how should those things be factored in? In other words, it is a rabbit hole. For most people a marriage is more than just a business arrangement.

My advice....talk about it together, try to work it out and come to an agreement you are both satisfied with. If that is impossible, maybe therapy. One person dictating to the other what is equitable (based on math or based on what people in an online investment forum think) will likely not bode well.
+1,000.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
User avatar
WarAdmiral
Posts: 256
Joined: Mon Jan 20, 2020 7:09 pm
Location: Boston

Re: Tax bill split between spouses

Post by WarAdmiral »

DreamsOfRetiring wrote: Wed Apr 07, 2021 8:44 am This is a bit controversial. My spouse and I keep our financial accounts separate. We agreed to keep things separate so we both have practice maintaining our own finances and investments. We are open about money discussions, and we co-own all large assets. Our income ratio is 4:1 ( me:her), so for any large expense we split it in that ratio.

The controversial part is splitting tax bills. Whats an equitable split of taxes? Please dont take this to mean I am trying to get my spouse to pay , but just theoretically has anyone approached the math?

Here are the numbers:
2020 - Income ~ 500K ( 4:1 ) W2s
Rough tax bill - Fed + State = 150K

Marginal Fed - 35%

Her withheld ~ 12K
Mine withheld ~ 138K
MFJ.

Your income: $400K
Her Income: $100K

Assuming no standard deductions, 401k etc

Tax Brackets:
$0 to $19,900 - 10% of taxable income
$19,901 to $81,050 - $1,990 plus 12% of the amount over $19,900
$81,051 to $172,750 - $9,328 plus 22% of the amount over $81,050
$172,751 to $329,850 - $29,502 plus 24% of the amount over $172,750

@172K, her $86K income, your 86k income. taxes are equal - $29502/2 =~ $15k
@200K ( her $14k + your $14k), taxes are 24% of 14k each. - $3K

Her total tax due: 18K

Your tax due until now: 18K

At this point, her income of $100k is exhausted and your first $100k are accounted for. After this from $200k to $329k you pay 24% tax, then until $500K - it's all your taxes as per below brackets.

$329,851 to $418,850 - 32% of the amount over $329,850
$418,851 to $628,300 - 35% of the amount over $418,850
$628,301 or more, 37% of the amount over $628,300
Last edited by WarAdmiral on Wed Apr 07, 2021 9:38 pm, edited 2 times in total.
an_asker
Posts: 3213
Joined: Thu Jun 27, 2013 2:15 pm

Re: Tax bill split between spouses

Post by an_asker »

MrJedi wrote: Wed Apr 07, 2021 8:50 am Seems like you should first estimate tax liabilities if you were filing single.

If you are filing jointly, this typically lowers the tax liability compared to just adding the two singles together. Maybe you can take the overall tax savings produced by filing jointly and split it by your 4:1 ratio.
I have a better suggestion.

Calculate taxes as a married couple filing jointly three times:

A) with her income alone
B) with his income alone
C) with both incomes

Best approximation of his taxes = (B + C - A)/2
Best approximation of her taxes = (A + C - B)/2

[Edited to add]: Using WarAdmiral's assumptions (and hopefully not making any mistakes in the mathematics)...


Your income: $400K
Her Income: $100K

Assuming no standard deductions, 401k etc

I get

A = $13,497.00
B = $89,654.00
C = $124,088.50

Best approximation of her taxes = $23,965.75
Best approximation of his taxes = $100,122.80
User avatar
bottlecap
Posts: 6636
Joined: Tue Mar 06, 2007 11:21 pm
Location: Tennessee

Re: Tax bill split between spouses

Post by bottlecap »

I agree with protagonist as well.

Ironically, it seems like this arrangement was to avoid having tough relationship discussions around finance and that very avoidance has created a bigger relationship problem. It’s easy to get along if you just gloss over the hard stuff ... at least until the underlying resentment brings it all crashing down.

You can try to come up with algebraic formulas to achieve harmony in marriage or you can just act like it’s a marriage and work it out between two people who are supposed to have each other's best interests at heart. No formula can account for the relationship dynamic between two people.

Good luck,

JT
Topic Author
DreamsOfRetiring
Posts: 65
Joined: Sat Nov 23, 2019 9:42 am

Re: Tax bill split between spouses

Post by DreamsOfRetiring »

drzzzzz wrote: Wed Apr 07, 2021 9:13 pm This will likely sound inappropriate. We too split taxes, since the bulk of our prior income and almost all of our accounts are separate. However, we don't bother to calculate how much either of us should pay, but just generally agree to split in a way that we think makes sense and works for us. Based upon your income, why are spending this much time on the question - especially since in the past you have only asked her to contribute an additional $1000? Is it worth all the fuss?
Just settled on the 1k again, like i have said I am more curious than trying to find an actual answer
Thesaints
Posts: 3677
Joined: Tue Jun 20, 2017 12:25 am

Re: Tax bill split between spouses

Post by Thesaints »

We follow the method others have already proposed: calculate tax for each as we were filing as singles and split MFJ bill in the same proportion.
It is probably the most equitable method if taxable incomes are not too different, but it is not perfect.
A few potential issues:

- In the extreme case of a spouse with zero income the other spouse would pay 100% of the taxes, yet he/she would pay less than if they were single. Shouldn’t the zero income spouse get part of the savings they help generate ?

- How does one distribute dependents when filing as singles ? One can’t use half a child and isn’t a single with dependents a head of household ?

- A spouse with lower income, if they were single, could be in the situation where taxable bonds are a better choice. The married couple instead can be in a situation where munis make more sense.
This could result in a potential paradox in which the lower earning spouse would pick taxable bonds which make the couple earn less in total, but make that spouse earn more after taxes.
Goal33
Posts: 1681
Joined: Sun Apr 12, 2015 12:30 pm

Re: Tax bill split between spouses

Post by Goal33 »

Given the income disparity I think you should be paying something like 100% of the taxes and also giving her an earned income tax credit.
DVMResident
Posts: 1533
Joined: Mon Aug 01, 2011 8:15 pm

Re: Tax bill split between spouses

Post by DVMResident »

DreamsOfRetiring wrote: Wed Apr 07, 2021 1:38 pm
sailaway wrote: Wed Apr 07, 2021 1:15 pm I would just consider the taxes owed (or refund) as the bill and split that according to the normal ratio.
that, as others have pointed out, is unfair to the lower earning spouse... since in reality MFS would yield a tax bill roughly in the ratio of 10:1 compared to a earnings ratio go 4:1...
I’ll decent here.

The household balance sheets are much more than a single line item. Taxes are just another bill. If all household expenses are split in a weighted ratio, it is balanced.

Who cares if higher earning spouse A pays for the mortgage while spouse B pays for the cell phone bill? Taxes are same as any other bill. Yes, as mentioned FICA taxes, can force spouse B into paying a higher percentage to taxes; so what? Spouse A picks up another bill (like health insurance or car payment or whatever) to offset the additional FICA contributions of spouse B. It just another input and output.

This approach brings up the issue of one spouse having more disposable income than the other. But there is where personal behavior and relationship dynamics comes into the mix.

FWIW, we approach our budget in a similar manner. I’m also the earner and saver and with the extra disposable I end up all the unexpected and vacations expenses. My spouse also has the nicer car, phone, and clothes. I don’t want that stuff. It works for us.
Last edited by DVMResident on Thu Apr 08, 2021 8:31 am, edited 2 times in total.
dknightd
Posts: 2556
Joined: Wed Mar 07, 2018 11:57 am

Re: Tax bill split between spouses

Post by dknightd »

Why worry. You are a couple.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds. Retired 9/19. Still working on mortgage payoff.
Monsterflockster
Posts: 643
Joined: Thu Nov 21, 2019 12:03 am

Re: Tax bill split between spouses

Post by Monsterflockster »

OP,

File separately. It’s the way you want it. This way you each get practice doing your own taxes.

Be sure to make sure if you have kids she gets 50%. For things like mortgage interest I’d say what it what you put in. Split or 1/4.

On another note... you know this is controversial and tbh splitting finances like this is crazy to me. So do you make your wife Venmo you half the bill when you swing gas up or go through the drive thru or you order separately? Best of luck to ya.
Post Reply