The Marriage Penalty

It's TAX DAY! So, in order to celebrate this festive day when the government takes your hard earned money, I decided to enlist the trusty help of my wonderful soon-to-be husband and pick his financial brain about taxes after you get married. Here what you need to know about "The Marriage Penalty." Enjoy!

Weddings. What’s not to love about weddings? It is a time when we are surrounded by friends and family. The bride gets to live the dream she had as a little girl. She gets to dress-up and create a magical wonderland fit for a princess. She and her groom have the world in front of them to stand up and profess their love to all. Then arm-in-arm, hand-in-hand they stroll down the aisle to live happily ever after…

…That is until tax time. Everybody loves marriage, especially the government. Now why does the government like marriage? The answer is simple: money. Wait a minute; isn’t marriage supposed to save you money? The answer is, in most cases, no.

Certainly living together saves you money. Less rent (or mortgage), less utilities, and less food are all great ways to save money when you combine your households. It may even come with less time spent on housework (at least for one of the lucky cohabiters). But does marriage save you money? Let’s take a look at the tax structure, shall we?

Let’s say you are a low income earner and make the maximum adjusted gross income (after deductions) of the first 2007 tax year tier. You’d be making $7,825 per year and taxed on 10% of that income which is $782.50. And say your potential spouse makes the same amount, thereby doubling your income to $15,650. How does this affect your taxes? Let’s take a look at the table. It just so happens that the top of the first tier for married couples is $15,650, the same as if you were to double the single tier, which means the same taxes. No problem right? Well, no problem if you both don’t have deductions, which we’ll talk about a little later.

Now let’s take a look at the next tier. The top of the second single tier is $31,850 and for married couples $63,700. Still double; so far, so good. Third tier: single - $77,100, married - $128,500. Wait a minute! If you double $77,100 it should give you $154,200, not $128,500. Where did that extra $25,700 of taxable income go? Well that, my friends, is where the marriage penalty begins. Instead of taxing you at the bargain rate of 25% on the entire third tier income for singles and doubling it, it decreases that spread by $25,700. Which means your paying the low, low rate of 28% on $25,700 ($7,196) instead of the 25% rate ($6,425) or 3% more ($771). If you had both earned identical amounts and stayed single, you’d be better off. And it gets worse the more you make. The fourth tier for single is $160,850, couples $195,850 a $35,000 spread and so on as you move up the ladder.

Not fair? You bet your sweet bippy it’s not fair. But hold on to your hats, we’re not done with this crazy ride yet. Remember when I spoke of deductions. Well, here’s the skinny on that. Typically, you will get the larger of the standard deduction set by the government or your itemized deductions. Generally, if you don’t have a mortgage or a business, you don’t need to worry about itemized deductions. However, if you do own a home: beware! In 2008 your itemized deduction per person is $5,450. Luckily, it stays the same if you’re married and each person gets their standard deduction and, when combined, equals $10,900. That’s $10,900 of non-taxable income we’re talking about here. So let’s say one of your lucky bride or groom to be owns a residence. The mortgage interest, property taxes, and other deductible expenses would be used to offset their income. Let’s say the bride owns the home and has $15,000 in deductible expenses ($15,000 less income she’s taxed on). The groom-to-be, who is cohabiting with the bride-to-be, doesn’t own a residence and gets his standard deduction of $5,450. Added together ($15,000 plus $5,450) gives you $20,450 of income that is not taxable. Sweet! But here comes the sour: when you get married, say goodbye to the groom’s $5,450 deduction. Floosh, down the drain. As a married couple, because you hypothetically share resources, you also share your itemized deductions. Your deduction has now been reduced to the $15,000 plus the minor deductions the groom has. Hence, you now pay taxes on an additional $5,450. This gets even worse if you both own a home, because now you can only claim one residence as a deduction, not two.

What a deal. You get married and you get bumped into a higher tax tier and get deductions taken away. No wonder the government encourages this system.

Now there are some situations where it is beneficial, such as when you have one very high earner and one that earns little to none. This widens the taxable tiers and includes more of the higher income earner’s wages in a lower bracket. Of course, you still have the deduction issue.

Now why not file as married filing separately? No luck. They’ve already altered your tiers to the married levels and, in some cases, you can’t take as many deductions or credits.

So what does this all mean? Well, anecdotally, love comes with sacrifice. And to still marry someone knowing the financial burden of the wedding and the additional taxes tacked on for the remaining years of your financial life, must mean that you really do love that person. So walk down that aisle knowing that every step you take is cash dropping out of your pocket with the dutiful IRS is sweeping it up behind you. Happy tax day, you crazy lovebirds!