One of my colleagues at WSB radio just got engaged this past week. Hooray!
She had a tricky question for me, though, after last Sunday’s Money Matters. It’s one that I think many people probably want answered. She asked me, “Wes, now that I’m engaged, will being married hurt our tax situation? Since we’re combining incomes will our overall rate go up? If it will help lower our taxes, should we get married before year end?”
These first two questions are tricky with many variables that can affect the outcome. The answer for her will likely be somewhere in-between. It may be a big help, or it may be neutral and not impact the amount they pay the government.
As far as basing her wedding date around their tax savings, I wouldn’t recommend anyone to pick a date based on the IRS’ calendar. The government taxes people for the entire calendar year on being married no matter when in the year they get married. For example, if you get married on December 31 2014, all your taxes in 2014 will be filed as married. On the flip side, if you get divorced, all your taxes will be filed as single within the year you get divorced. However, both of these life events are too important to pick their dates based on your taxes.
Studies show that slightly more than half of married couples pay less in taxes now [source: Weston]. However, that still leaves a lot of people not benefiting from being married. Let’s look at some general scenarios that demonstrate how being single or married can impact your taxes if you are just filing with a full time employment W-2 and a standard deduction, rather than itemizing your deductions. I reached out to a few of my accountant friends at Barners Merritt & Barnes LLC and Levy Tax and Consulting, LLC to help me with refining these examples.
Single Steve
Steve makes $90,000 a year.
Steve files his taxes with the standard single deduction of $6,100.
His effective tax rate is 19.9 percent.
This means Steve will pay around $15,900 this year in taxes.
Married One Earner Olivia and Egan
Olivia is currently the breadwinner for their little family while Egan is taking time to do some soul searching. Olivia earns $90,000 a year.
Olivia and Egan file their taxes with the married standard deduction of $12,200.
Their effective tax rate is 13.7 percent.
They pay around $9,600 in taxes.
Comparing Olivia and Egan to Single Steve, it’s easy to see how being married can provide a tax benefit when you have a single income.
Married Different Earners Diane and Eric
Diane and Eric are both working, but Diane is just working part time right now. Diane earns $20,000 a year and Eric earns $70,000 a year, totaling up to $90,000.
Diane and Eric file their taxes with the married deduction of $12,200.
This puts their effective tax rate at 13.7 percent.
They pay around $9,600 in taxes.
If Eric was filing as single he would be paying almost $11,000 in taxes, so with both people working but earning different levels of income there is a tax benefit for this family.
Married Equal Earners Margaret and Mark
Margaret and Mark are both working, and they each earn $45,000 a year totally to $90,000.
Margaret and Mark file their taxes with the standard married deduction of $12,200.
This puts their effective tax rate at 13.7 percent.
They pay around $9,600 in taxes.
Margaret and Mark are an example of the lack of tax benefit that some people find in marriage. If they were still single they would each be paying around $4,800 in taxes. When they are married filing their taxes jointly they are paying a total of around $9,600. Since they are equal earners there is no tax benefit for them, and their taxes feel the same as when they were single.
High Earning Power Couples
A pain point for many high earning married couples is the different earning ceilings for singles versus married folks. For example, if you’re single and making between $36,900 and $89,350 you fall into the 25 percent tax bracket, while if you’re married and your income totals up to be between $73,800 and $148,850 you’re in the 25 percent bracket. This means if you both earn $85,000 a year, with your combined income of $170,000 you’ll move up into 28 percent tax bracket rather than the 25 percent bracket you both would have been in while single.
More simply put, a married couple could get catapulted into paying taxes at a slightly higher rate sooner than a single person.
The impact of various exemptions
Something to remember when looking at these examples is that we are not including any factors that could change their taxes, like having a mortgage or children. These variables change the amount that you are able to deduct. My accountant friends had a field day with these examples when I asked them for help with this blog. Rather than trying to recount everything here, I would recommend finding a good accountant to help you with your taxes if you are planning to file anything other than the standard deduction. I’m actually the Keynote Speaker for the Southeastern Accounting Show that’s being hosted in Atlanta next week, and their website provides the tools to help you find a CPA to fit your needs.
Bottom line:
If you’re single, making around $80,000 (or less), and you marry someone with no or lower income, as a couple you will likely have a lower overall tax rate than when you are single. In this case (rare as it may be) is clearly one where marriage is a tax friendly endeavor.
If you are both making about the same income under certain thresholds and join forces, your overall tax rate as a couple should stay about the same as when you were single, filing as a single tax payer. However, if you and your significant other are both high earners you might just find that being married actually costs you more in taxes.
Don’t let taxes stop you from marrying someone you love. However, it’s a good idea to look at and talk about your financial situation before tying the knot.
