Marriage Tax Penalty: Is it real? (*Hint… Yes it is)

My boyfriend and I have been dating for over eight years now and we’re seriously discussing marriage. I’m not sold on the whole marriage thing — I don’t believe one needs to be contractually committed to another person to have a lifelong partnership and a family. It seems that with all of my passionate hatred of organized religion and government getting involved in social freedoms I should not be considering getting “actual” married. Sure, a small ceremony would be nice, but the legal side of it frightens me quite a bit — especially since so many people I know who are older are divorced and worse off for it.

While I don’t at all expect to get divorced ever (hey, we’ve made it almost nine years as bf/gf and if we do get married it will be on our 10 year anniversary – by then I think I’d know what I’m getting into) I still don’t know if marriage is a good idea, financially speaking. The way marriage is set up… and the tax laws around marriage… is that you are rewarded for having one working parent and one stay-at-home parent. If you have two working parents and earn reasonable salaries you actually can have what they call the marriage tax penalty. Before tying the knot, I really want to better understand if that is going to cause a fiscal knot in my future bank account.

After writing this post, I found this awesome breakdown by Financial Samurai which details out the tax benefits or penalties for different types of married couples — it is a must read!

How Marriage and Tax Works

Starting the year you get wed you are officially a married couple in the eyes of the government — even if that happens on the last day of that year. You have a choice now to file married jointly or married separately. If you and your partner both work and make equal salaries, unless you’re low earners like teachers or social workers, you’re going to probably be better off filing separately.

The problem is — married filing separately doesn’t actually mean the same thing as filing as a single person. If you file separately while married you cannot take deductions for tuition fees, student loans, social security benefits tax-free exclusions, credits for the elderly and disabled, earned income credit, hope or lifetime learning education credits, child care credits, etc. And if you decide to file separately and one partner wants to itemize, the other partner needs to itemize their taxes too, even if they have no reason to do so.

But the bigger issue is for higher income earning couples. As you can see below, married filing separately and single filers do not have the same tax brackets. If you are married filing separately, anything over $74.4k will be taxed at 28%, where if you are filing single you have until $89.3k before you are bumped into the 28% tax bracket. If you happen to earn more than $180k per year as a ginle person you’ll still be within the 28% tax bracket, but if you’re married filing separately you’re going to pay 33% for any income over $113.4k.

Of course if one parent works and the other doesn’t the tax table works in that couple’s favor. I.e. say I work and make $200,000 per year and my husband stays at home and makes sure that the kids eat and don’t die — filing jointly we could remain in the 28% tax bracket, whereas if I were filing single and not married my top income would be in the 33% federal bracket.

2014 Tax Brackets (for taxes due April 15, 2015)

Tax rate Single filers Married filing jointly or qualifying widow/widower Married filing separately Head of household
10% Up to $9,075 Up to $18,150 Up to $9,075 Up to $12,950
15% $9,076 to $36,900 $18,151 to $73,800 $9,076 to $36,900 $12,951 to $49,400
25% $36,901 to $89,350 $73,801 to $148,850 $36,901 to $74,425 $49,401 to $127,550
28% $89,351 to $186,350 $148,851 to $226,850 $74,426 to $113,425 $127,551 to $206,600
33% $186,351 to $405,100 $226,851 to $405,100 $113,426 to $202,550 $206,601 to $405,100
35% $405,101 to $406,750 $405,101 to $457,600 $202,551 to $228,800 $405,101 to $432,200
39.6% $406,751 or more $457,601 or more $228,801 or more $432,201 or more


This all seems like marriage isn’t the best idea unless I plan on remaining unemployed and being a gold digger the rest of my life. It’s hard to know what the future holds, but the reality is that marriage might not be the best idea financially speaking. In fact, if I get married it will be likely that my husband and I will each earn around $130k AGI each, or more. If we earn $260k jointly we are in the 33% tax bracket. If we each earn $130k and file separately we are also in the 33% tax bracket for every dollar earned over $113k. BUT if we weren’t married at all and earned $130k all of our income would be in the 28% tax bracket.

Am I missing something here, or is marriage just a big scam to get us to pay the government more of our hard-earned money?

This article seems to make the case that marriage isn’t worth it — unless you plan to have only one working partner or both be very low income earners.

Some Other Items to Note

  • BONUS: You can get joint health insurance if one partner has it through work… this isn’t a tax benefit but it is a benefit to being married.
  • PENALTY: The Child Tax Credit provides up to $1000 for every child under 17 in one’s care, but if you file a joint return the credit phases out at $110k income total for both partners. If you file separately you don’t get the credit at all. If you are not married and file single it phases out at $75k (**again a reason why this should be determined based on cost of living because $75k is a large salary in some areas of the country and in others it’s not enough to afford a basic lifestyle.)
  • PENALTY: Miscellaneous deductions can lower taxable income, but they need to add up to more than 2% of AGI to actually matter. If one spouse has these deductions but the other doesn’t, it can be a big headache since both spouses have to itemize if one does. That also can cost more to prepare since it’s no longer standard TurboTax click click and done.
  • BONUS: If you’re married and own a home with your partner, you can take $500k in gains tax free when you sell for your next house. If you’re single you only get to take $250k in gains. That said — most of us won’t have more than $250k gains on a property because we’re buying houses that at most are $1-$1.5M. Aimirite?
  • PENALTY: Obamacare requires an additional 3.8% tax on net investment income when gross income exceeds $200,000 at a single tax payer… BUT $250k as a married couple. So basically if you earn $125k each (totally normal in cities like San Francisco or New York) you are going to pay a lot more on your investment income. Being single and making under $200k is a lot more reasonable.
  • BONUS: If you are married you can give each other as much money as your heart pleases because you basically now are the same person. If you happen to die unexpectedly, god forbid, your partner can get all your monies tax free. This is the one true bonus of marraige left but does it outweigh the extra taxes paid annually as a married couple? (Otherwise I’d think you could just get married later in life once you are ready to take advantage of tax-free cash sharing.)
  • PENALTY: This also provides a strong incentive for your partner to hire an assassin to make you disappear, if you happen to be the keeper of said monies (or maybe I’ve just been watching one too many episodes of law & order)
  • PENALTY: To deduct unreimbursed medical expenses they must be more than 7.5% of your AGI. If one partner has a big surgery that costs a lot and cannot work during the year — and is single or filing separately — he can take that deduction. But if the couple files jointly and the other partner makes a lot more then the deduction is harder to obtain.
  • PENALTY: If you make more money, more of your Social Security is subject to tax. You’re better off filing single vs married to keep more of your SS benefits. Also if you are a couple with two working partners — you’ll end up with more social security in the long run if you remain single!
  • PENALTY: The AMT (Alternate Minimum Tax) exclusion for two unmarried individuals is much lower than that for a married couple, and this can cause upper middle class earners thousands of dollars in extra tax each year.
  • PENALTY: If one partner earns less money in one year than another, if the couple remains single filers one person who earned more money can gift the other up to $13k in appreciated stock, tax free, which she could sell at her capital gains tax rate (which could be 0% if she is not earning anything that year, but filing jointly at that point might actually save the couple more.)
  • PENALTY: A single person can deduct up to $3,000 in capital losses per year. Married couples… can only deduct up to $3k in capital losses (not $6k.)
  • PENALTY: If a couple is unmarried and, say, the woman owns a house in her name and the man gets sick and relies on Medicaid to pay for a nursing home, Medicaid cannot come after the house that the woman owns. However if they are married they can take the house away!
  • PENALTY: The Roth IRA contribution limit for a married couple is lower than it is for two single individuals! If you’re a single person you can invest $5500 per year in a Roth IRA if you earn less than $114k per year (AGI) — BUT — if you’re married, you can only earn $181,000 jointly to invest in a Roth. That’s $47,000 less income you can earn and still be eligible to invest in a post-tax IRA account.
  • PENALTY: Write-offs from rental real estate can be used to offset ordinary income unless your AGI exceeds $150,000. That is — $150k as a single person or married — that amount is the same!

 

 

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10 comments

  1. james says:

    I wish more women thought like you. You’ve answered your own question regarding marriage. You and your bf shouldn’t even discuss it at all unless he’s the one bringing it up. Just have a big celebration if you want a wedding like party and don’t make it legal. You sound very anti-marriage, so don’t let your bf, family or anyone else pressure you into it.

  2. james says:

    I’m a divorced man in my 40s and never will marry again, so take this for what it’s worth. Taxes are trivial things to consider for whether to marry someone or not. Ask yourself if marriage is truly important to you and whether your potential spouse is marriage material who’s responsible and whom you can trust completely. Those things should be the top consideration for marrying and not tax consequences. Marriage is basically signing a legal contract for a sense of security. Divorces can be extremely costly and thus being married makes couples try much harder to work on their relationship and issues to stay together rather than splitting up.

    You may honestly feel you and your boyfriend will stay together forever, but so did many other divorced couples. You don’t know how you or he’ll feel 10 years or 20 years from now. If you’re not married, it’ll be so much easier to end things and move on. Lastly, if taxes are the only reason to delay marriage, obviously finances are critical to you, so definitely get a prenup from a lawyer.

    1. Joy ( User Karma: 0 ) says:

      I get what you’re saying, but most people don’t realize how marriage is a scam by the government to get you to pay them more money! Yes, there can also be the costly issue of divorce (and I know a lot of divorced couples as well who say to never get married) but ultimately even if you plan to spend the rest of your life with one person and actually do there is little reason to get married if you are part of a couple where both parties work. The sense of security isn’t needed if you’re confident you can support yourself… marriage is outdated and designed for a couple where the man works and the woman doesn’t. Even tax law is set up to reward this structure (if one person in the marriage makes $300k and the other makes $0 you’ll pay less in taxes then you would if both parties filed single, but if one person makes $150k and the other makes $150k (same amount, mind you) you’ll end up paying more in taxes then you would if you filed single. You might end up paying $10,000 to $15,000 more per year. Given the cost of living these days, that’s a lot of money. If it costs $250,000 to raise a child then NOT getting married covers more than one full child over the course of a lifetime. I don’t need to pay a fine to have some sense of security in my relationship — I have that already. I’m lucky enough to have met the one guy in the world who is ridiculously loyal and would never want to leave me unless I do something absolutely terrible (and I don’t plan to.) So you can say that you shouldn’t consider taxes when deciding on marriage, but I can’t understand why not. Marriage is after all a business agreement. If you need to be married to work through your issues before splitting up because divorce is too costly to deal with then perhaps you’re not mature enough to be married. Lots of people get married after dating for under 5 years and you can’t really know a person in that time. I’m not saying I’m perfect but I’ll have been with my bf for 10 years when we get committed to each other officially, so I’m not too worried. I already know exactly what I’m getting myself into.

  3. James says:

    Marry only if marriage is important to you. Otherwise, don’t do it. No need to make the decision so complicated. Also tax implications definitely shouldn’t be one of the decision criteria.

    1. Joy ( User Karma: 0 ) says:

      Why should tax implications not be one of the decision criteria? I see them as the ONLY decision criteria. I’m already committed to my partner for life and he is committed to me. Marriage is just a legal contract which makes it more expensive to live if two people want to work. It doesn’t make sense. I think if I run the numbers and it works out as I expect, I’m going to get married when I’m 60 right before SS benefits kick in and when we’ll be in a lower tax bracket anyway. I think we’ll end up getting fake married now.

  4. Leigh says:

    Yup, this contributes to my not wanting to get married 🙂 Our combined gross income is over 300k, so there’s definitely a tax penalty. It seems silly to me why we can’t just be taxed separately, so I guess we just won’t be getting married any time soon!

  5. kt says:

    The $500k tax free home gain is not really a marriage bonus. If you both buy the property together unmarried you get the same tax break of $500k ($250k each) since you split the gain 50/50 if you each have 50% share in the property.

  6. David says:

    One extremely important advantage to being married in certain circumstances: someone who is married cannot be compelled to testify in a court of law against their spouse. You never know when you might find yourself in a tricky legal situation and this protection could come in handy. I believe that domestic partnerships enjoy the same protections, but opposite sex couples of your age group are not currently eligible for non-marriage domestic partnerships in California.

  7. Exactly. And while I agree at some point two resources get exorbitant (i.e. two spouses making $500k each), the way the laws are set up they make it much more challenging to afford living in a high cost of living area while married and both earning income. I’m now seriously discussing NOT getting married with my boyfriend, at least not until. we’re much older and getting ready to retire – since SS benefits seem to be the only reason to get married.

  8. Taylor Lee says:

    The way a former tax attorney explained it to me was that if both spouses are high earners then yes, marriage penalty tax is annoying. But if one spouse is a low earner and the other a high earner, then the couple is actually benefitted by getting married. Note that if my spouse was a stay-at-home, that it would actually DECREASE my taxes.

    There are a lot of weird an archaic reasons that taxes were set up this way (not in small part due to the fact that single-earner households were assumed). Not to mention that this kind of does the progressive taxation job of taking more income from high-earners who, with pooled resources, become even highererer(er)-earning units.

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