Photo by Nataliya Vaitkevich
There is a penalty you should be aware of as you approach the consideration of official marriage. Due to the way the U.S. tax brackets are structured for married couples filing jointly compared to single filers, it may cost your family a significant amount of money each year.. Essentially, the tax brackets for married couples are not exactly double those of single filers, particularly at higher income levels. This discrepancy leads to a situation where a couple pays more in taxes together than they would if they were each taxed as single individuals on the same income.
For example, if two high earners get married and their combined incomes push them into a higher tax bracket when filing jointly, their taxable income can be subject to a higher tax rate than if they were taxed individually. This issue arises because the tax code is designed to provide benefits for married couples with one earner or with significantly disparate incomes, but it doesn’t scale as evenly for two high earners, resulting in a penalty. Additionally, certain tax credits, deductions, and exemptions phase out at higher income levels, and these phase-outs can begin at lower levels of combined income for married couples than they would for each individual if they were single. This can further contribute to the increased tax burden for high-income married couples. Talk to your tax person before you get married, and as always do your own research. I asked my tax guy specifically if there was anything I should be concerned about tax-wise when I got married. He told me no, and the next tear when I ended having to pay out more than I normally would have got back, I nearly lost my mind. Needless to say, that guy is no longer my tax guy.
There are a lot of issues here that should have been fixed decades ago. I’m not going to rail at the ridiculous state of our politics, but I feel like this is just a simple issue of adjusting the numbers. There is a real problem with the way that high income is defined. I feel that you can’t just apply the same metric across all households in the country, the numbers should be tweaked yearly based on the economy and your income relative to cost of living. My wife and I together make less than the median income of the town we live in, but we still pay a large penalty each year for the privilege of being legally married. Compared to the rest of the country we might have higher income, but in Southern California we are barely average. My wife is Catholic and marriage is important to her, but even she has considered the financial benefits of getting a divorce. I don’t really like to think about how much money we have given up for 11 years of marriage but it is likely more than the full cost of my brother’s home in Maine. It will be interesting to see if the institution survives the increased costs of living across the country.
Is this the beginning of the end for marriage? I doubt it, at least not in our lifetimes. Matrimony is too ingrained in our culture and economy to go away easily. There are also many areas of the country where it is still possible to survive on a single income. I do know plenty of couples though, that have been together for years and have agreed not to get married because of the cost. Some couples even have a wedding to convince their families and just never actually file the paperwork. I have even heard that in some states a couple can get divorced at the end of the year and remarry at the beginning of the next year to avoid the tax burden. I don’t think that would work in California since it takes about 7 months to finalize a divorce.
So, if you are in this position how do you avoid some of the tax burden? Many people will not be able to avoid the penalty completely but there are some things you can do to minimize the damage. Ask your tax person if filing separately instead of jointly will help. Make sure you maximize your pre-tax retirement contributions like 401(k)s and IRAs. Consider a Health Savings Account or a Flexible Spending Account to reduce your taxable income. Live in your own house instead of renting, you can reduce your tax burden significantly with all the itemized deductions available from owning a home. If you have rental properties consider getting your real estate license so you can write off more passive income each year. There are more options which a better educated financial planner can help you with, especially if you are a business owner.
Whatever your situation, it is good to know that you can save a lot of money by accounting for taxes. For many people, getting married might actually save you money! If you own your house or multiple homes, and or have a business it is probably worth the expense to get some professional tax advice. I tried doing my own taxes a few years ago and simply could not get the same numbers as my current CPA. I estimate that he saves me on average, 7 times what I pay him, by finding deductions and loopholes I would not have thought of. Good luck and safe bookkeeping. The deep waters of the American tax code is no place for amateurs.
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