For many people, marriage is a blessed start to a new chapter in life. Unfortunately, for many people, marriage can often come with an unexpected tax bill. Here are a few key things that newlyweds should know about marriage and taxes before tying the knot.
Your tax bill could go down
For many couples who end up filing joint tax returns, their taxes go down. This is because marginal rates for joint filers allow for more income to be taxed at lower rates than for individual filers. As an example, for individual filers in 2020, the first $9,875 of taxable income is taxed at 10%, taxable income between $9,876 and $40,125 is taxed at 12%, and taxable income between $40,126 to $85,525 is taxed at 22%. Compare that to a married couple filing jointly — the first $19,750 of taxable income is taxed at 10%, from $19,751 to $80,250 is taxed at 12%, and $80,251 to $171,050 is taxed at 22%.
In short, the amount of income taxable under the lower brackets doubles for married couples filing jointly. This benefit means nothing if you have two spouses who make the exact same amount of money — in which case, they’d have the same tax consequences whether filing jointly or individually. However, most spouses don’t earn the same amount of money. Whether by choice of profession or other factors, one spouse typically makes more. In the case of single income households, in which one spouse earns most — if not all — of the taxable income, the tax savings is significant, with twice as much income being taxable at lower rates.
Your tax bill could go up
There are two different kinds of tax increases that we commonly see with newlywed couples. The first is often referred to as the “marriage penalty” and impacts newlyweds in the top two marginal tax brackets, while the second is a newfound ineligibility for tax credits and other incentives that one or both spouses may have enjoyed before marriage.
Marriage Penalty
The “Marriage Penalty” refers to a scenario in which two taxpayers who file jointly have more income taxed at the highest marginal tax rate than they would if they were unmarried, individual taxpayers. This involves a bit of math, so bear with us.
For individual taxpayers, taxable income between $207,351 and $518,400 is taxed at 35% — the second highest marginal rate. Taxable income in excess of $518,400 is taxed at 37% — the highest marginal rate. For married couples filing jointly, taxable income of $414,701 to $622,050 is taxed at 35%, with taxable income in excess of $622,050 taxed at 37%. Consider for a moment two individual taxpayers who each earn $518,400 of taxable income. That amounts to $1,036,800 of taxable income, of which $622,098 ($518,400 – $207,351, multiplied by 2) would be taxed at 35%. If those taxpayers were married, $207,349 of that same income would be taxed at 35% and the rest — $414,750 — would be taxed at 37%. In real dollars, that creates a marriage penalty of up to $8,295. Compare the tax rates of individual filers to those of married taxpayers filing separately, in which $207,351 to $311,025 of taxable income is taxed at 35% and taxable income in excess of $311,025 is taxed at 37%, and you realize that this marriage penalty isn’t merely an oversight — it was deliberately written into the tax code.
Lost Credits
A far more common issue facing low- to middle-income newlyweds is the loss of tax credits that one or both spouses enjoyed before marriage. Many tax credits have upper income limits and are either gradually phased out or lost entirely as a taxpayer’s income increases. This presents a unique issue for newlyweds who, for most tax purposes, become one joint taxpayer, especially if one spouse had a lower income than the other before entering into the marriage.
One incredibly common example of this is the Advance Premium Tax Credit (APTC) offered to help offset the cost of Affordable Care Act (ACA) Marketplace insurance plans. These tax credits are unique in that they’re offered to taxpayers to use throughout the year to offset their monthly health insurance premium costs, but a taxpayer’s eligibility for those credits is actually determined at the end of the tax year based on the income they received throughout the year. Because a taxpayer’s filing status (single, married, or head of household) and income is determined as of the last day of the tax year (December 31st), a taxpayer whose income is low enough to qualify for the tax credit on their own could get married on December 30th and retroactively lose their eligibility for the tax credit — meaning they’d have to pay some or all of the credit back at tax time. This commonly happens when a lower-income taxpayer marries a higher-income taxpayer, and it can increase the newlyweds’ tax bill by thousands of dollars.
What should we do?
Planning big events (e.g., buying or selling a business, investing in real estate, etc.) usually involves a bit of tax planning. So should marriage. Here are a few ideas to help avoid the unexpected tax hit from your big day.
Run the numbers beforehand
For most wage-earning married couples, it’s surprisingly easy to figure out — in rough terms — what they’ll owe in taxes at the end of the year. It generally involves figuring out the couple’s taxable income (anticipated gross income for the year minus pre-tax expenses and the standard deduction for each spouse) and multiplying it by the current federal and state marginal tax rates for married taxpayers filing jointly. Assuming no other deductions or adjustments to income, this can be a quick (though generally not 100% accurate) way of estimating how much the couple will need to pay in taxes. Once that’s figured out, the couple should look at their paycheck withholdings and figure out how much will have been withheld from their pay by the end of each year. This is easier when dealing with salary income, since the income and withholdings tend to be consistent across pay periods.
Plan accordingly
While it doesn’t make a whole lot of sense to get married at the beginning of the tax year (unless January wedding appeals to you. You do you!), planning ahead of time can save you from some unexpected bill shock at the end of the year. It might be a good investment in your future to talk with an accountant or financial planner who can help you map out your joint finances and go over what tax consequences you might expect. Maybe you’ll lose the Advance Premium Tax Credit and need to repay it, or maybe you’ll lose the Earned Income Tax Credit and should plan to do without it. Maybe you’ll get a bigger-than-expected tax refund because of the marginal rates for joint filers. Either way, knowing ahead of time can save you stress and help you avoid bill shock down the road.
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