It’s a common question we get as financial advisors: What are the tax benefits of marriage?
As people plan for their big day, the last thing on most couples’ minds is taxes. However, marriage can have a big impact on a couple’s financial situation, especially when it comes to how they file their tax returns and how much tax they’ll pay.
Depending on the circumstances, there can be some significant tax benefits of marriage, but there can also be some drawbacks. For many people, the main tax benefit of marriage is ease of filing: they get to file a joint tax return, and sometimes, take more deductions.
Minimizing any potential negative tax implications of marriage requires advance planning — ideally, before you and your betrothed walk down the aisle and say “I do.”
Choosing a Tax Filing Status
The first thing to plan for in order to realize the tax benefits of marriage is how you and your spouse will file your federal tax return. You have two options: married filing jointly or married filing separately. So long as you are married on December 31 of the tax year you’re filing for, you must choose one of these options — you can no longer file as a single person.
For most couples, choosing to file jointly will result in the most tax benefits of marriage because a number of deductions and credits either aren’t available or are reduced if they file separately. Filing jointly also means that only one tax return is required, which will save time and money from a tax preparation standpoint.
Marriage Penalty Eliminated for Most Couples
The Tax Cuts and Jobs Act made some important changes that will affect the tax benefits of marriage. In particular, these changes eliminate the so-called marriage penalty for most, but not all, couples.
The “marriage penalty” refers to a scenario in which a couple would pay more in federal taxes after they get married than they would pay if they remained single. This was due to the fact that in the past, the tax brackets didn’t double to accommodate dual-earning couples.
Tax reform adjusted the tax brackets so that the marriage penalty only hits the highest-earning couples. Now, most of the brackets are doubled from the single and married filing separately to the married filing jointly bracket.
The only exception is the new top bracket of 37 percent. This rate covers income over $518,400 for singles and $311,025 for married couples filing separately. The 37 percent tax rate for married couples filing jointly does not kick in until income is over $622,050. So a couple earning this much money could still be subject to the marriage penalty. Congress indicated that they preserved the marriage penalty for high-earning couples in order to fund other tax breaks contained in the legislation.
The Marriage Penalty and the EIC
Low-earning couples could also be hit with a marriage penalty if they claim the earned income tax credit (EIC). The EIC is a refundable tax credit available mainly to working parents with children.
This is because taxpayers are no longer eligible for the EIC once their income exceeds a certain level, which is based on how many children they have. For example, a married couple with one child will no longer qualify for the EIC once their income exceeds $47,646 for tax year 2020. Interestingly, to qualify for the EITC, the income limits for married taxpayers are not double those for single taxpayers. For example, the income limit for the 2020 tax year is $41,756 for a single taxpayer with one qualifying child, but only $47,646 for married taxpayers with one qualifying child ($41,094 and $46,884, respectively for 2019).
According to the Tax Policy Center, a couple with one child earning $25,000 each would pay $3,584 less in taxes by remaining single. This is because their combined income of $50,000 exceeds the EIC limit, but their individual income of $25,000 remains below the limit.
Investment Income, Medicare Taxes and SALT
Something that might impact the tax benefits of marriage for high-earning couples is the potential for being penalized by having to pay the net investment income tax of 3.8 percent and the Medicare surtax of 0.9 percent. Single filers aren’t subject to these taxes until their income exceeds $200,000, but the threshold for married couples filing jointly is $250,000. This means a couple would have a combined threshold of $400,000 if they each remained single, but just $250,000 if they got married. If one spouse earns $150,000 and the other earns $100,000, they would not be subject to these taxes if they remained single, but they would be if they tied the knot. The threshold for married filing separately is $125,000. Tax reform’s limit on the itemized deduction for state and local taxes (or SALT) to $10,000 could also negatively impact couples who get married. This limit applies to both single filers and married couples filing jointly. So if each spouse has $10,000 in SALT and they get married, their total deduction will be just $10,000, not the combined $20,000 if they each remained single. Keep in mind that a married couple would need to have another $14,000 in itemized deductions for it to make sense to itemize rather than taking the standard deduction that has increased to $24,000 in 2018 or $24,800 in 2020.
If you are recently married or plan to get married soon, you should meet with a financial or tax advisor to talk about how your marriage could affect your tax situation. The sooner you plan, the better chance you’ll have of enjoying some of the tax benefits of marriage. Personal Capital’s team of dedicated financial advisors can help with tax optimization and strategy as it relates to your holistic financial plan. Schedule a free consultation with an advisor today for a free, no-obligation review of your portfolio and financial plan.