The marriage penalty: what it is and how to prepare(Read article summary)
Tax-wise, marriage has its advantages and disadvantages. find out how to maximize the advantages and avoid the disadvantages.
Jim and Liz had been living together for what seemed like forever to their friends – 10 years and counting. Then the happy couple announced they had finally decided to tie the knot. Although their parents were ecstatic (“Finally, some grandchildren!” was her mom’s reaction), some of their friends were quick to point out a downside to making this change: the dreaded “marriage penalty.”
Under current law, a dual-income family will likely pay more in taxes compared with two single people—especially if both are medium- to high-income earners. This is what is referred to as the marriage penalty.
As the same time, there are many financial advantages to being married. And there are steps you can take to prepare for the marriage penalty. The key is to plan ahead.
Pros to getting married
Sure, there are plenty of good reasons to get married — sealing your bond with the legality of marriage can be a profound testament of your commitment to one another. Marriage is considered by many a strong foundation for building a family. Not to mention, weddings are usually an awesome theme for a party.
But there are also quite a few tax and financial advantages that come with legal marriage. One is the ability to pick the best options among employee benefits that both spouses have access to, including health insurance. Another is that married couples who are both U.S. citizens can pass their assets to each other without having to worry about gift or estate taxes – which can become an issue if you want to, say, buy a house together.
Tax preparation itself is often simpler and less expensive for married couples, who only need to file one federal and one state return. Single-income-earner families with a stay-at-home spouse may actually pay less in tax (commonly known as the “marriage bonus”).
Pushed into a higher tax bracket
The marriage penalty is due to the fact that married income thresholds, although higher than for single incomes, aren’t double the single thresholds. So, a married couple starts to get into a higher tax bracket more quickly. Congress hasn’t caught up to the reality that most families need to have two incomes these days to live comfortably and save for the future.
Avoid surprises on tax day –3 ways you can prepare for the penalty
- Have your tax preparer do a pro-forma (the fancy way of saying an estimate) of how much you would have to pay if you were filing jointly as a married couple (or MFJ, married filing jointly). Or if you and your new spouse are filing your own taxes, work up your own estimate on Turbotax.
- Consider an additional pro-forma for MFS (married filing separately). If you are concerned about your partner’s tax history (i.e., unresolved IRS issues, liens), this may be how you will want to file.
- Once you know the numbers, determine the appropriate level of tax withholdings each of you should be claiming on your paycheck. If you pay estimated income taxes each quarter, figure out what your estimated tax payments need to be and how you want to allocate them between you. This won’t necessarily reduce the marriage penalty, but it can help split up the tax burden more fairly.
Get the hard numbers and have a frank discussion.
Money can be a touchy topic for many couples, especially if they’re not completely confident in how they are managing their finances. Take the Mosaic Financial Fitness Challenge to learn how to have better habits and better dialogue with your partner about money.
Learn more about Steve at NerdWallet’s Ask an Advisor.