Tax Ramifications Of Being Married
February 4th, 2014 at 5:54 PM
This article will explore some of the advantages and disadvantages of being married for tax purposes.
Married, Filing Jointly
You hear it all the time. Lawmakers allow married people to use the most-favored tax-rate table: the highly touted Table 1, Married Individuals Filing Joint Returns.
True, marriage can produce a tax-rate advantage. But what’s often missed is that the marriage could increase taxes if the parties to the marriage bring the wrong income.
The only way to know how marriage works tax-wise is to run the numbers through the tax return.
I did just that. I used average-sized deductions that help us show you how you benefit or not with marriage.
You save tax money when you marry someone with a lot less taxable income than you have. For example, say
- You have taxable income of $213,050, and
- Your prospective mate has taxable income of $10,000.
If married and filing a joint return, you and your mate would enjoy federal income tax savings of more than $5,500. Further, you realize the marriage savings year-after-year, which means that you could accumulate a sizable advantage during your lifetime.
The marriage penalty grows when both you and your prospective mate are high earners. For example, say you each earn $225,000 in taxable income. If you marry, you will pay more than $9,000 in additional income taxes.
Over the years, lawmakers have worked hard to eliminate the marriage penalty. In the 1980s, the marriage penalty was so mad that there were cases of couples divorcing on December 31 and remarrying on January 1.
Now that the marriage penalty is far less, the ducking off to the Dominican Republic (Guam is a better choice) for a quickie divorce on December 31 followed by a quickie remarriage on January 1 has pretty much disappeared. That’s especially true when there’s not much of a marriage penalty or bonus.
Say that you and your prospective mate each have $80,000 in taxable income. If you marry, you will pay about $400 more a year in federal income taxes — not close to being worth the trip to get divorced and remarried.
You might marry a tax shelter. Let’s say you are currently single and you have taxable income of about $80,000 with a federal tax bite of about $16,000.
Say your prospective mate begins a new business and that business generated a $95,000 tax loss for the year.
If you marry, you tax bite of about $16,000 goes completely away because you offset your taxable income with your mate’s operating loss.
As an individual, you need “compensation” to qualify for a tax-deductible IRA. In general, “compensation” means wages, salaries, fees, commissions, tips, bonuses, and self-employment income.
If married, you can qualify to contribute on behalf of the “jobless spouse” who has no compensation. That’s possible advantage 1.
Also, the income limits that apply to your IRA contribution when you are a participant in a qualified retirement plan increase substantially if you are married. That’s possible advantage 2.
Sale of Residence
Paying zero tax on profits is about as good as it gets (tax-wise, that is).
If you are single, you can qualify to exclude from taxation up to $250,000 of home-sale profits.
If you are single and own the home jointly, you and your mate can each qualify to exclude up to $250,000 of gain attributable to your ownership interests.
If you marry, you can qualify to double that taxable exclusive from $250,000 to $500,000 on a single home. And the rule is easier than you would think.
For example, if you and your mate lived together in the home for two of the previous five years, you could exclude on a joint return up to $500,000 if either you or your mate owned the home. In this example, you and your mate both must first pass the required “use” test and then one of the two of you must pass the “ownership” test.
As you know, you pay income taxes during your lifetime, and then if you accumulate enough cash, investments, and property during your lifetime, your heirs may have to pay the estate tax when you die.
Federal estate and gift tax rules give special advantages to married couples.
For 2013, an individual’s estate qualifies for an exclusion of up to $5.25 million from estate taxes.
If married, you and your mate can plan to exclude up to $10.5 million from estate taxes.
Unlimited Marital Deduction
The unlimited marital deduction allows you to pass assets to your spouse with no federal estate or gift taxes imposed, provided that your spouse is a U.S. citizen. In other words, you can plan your estate so that it does not pay estate taxes until both spouses have died.
This gives the surviving spouse the ability to enjoy all the assets until death, undiluted by the estate tax.
I have touched upon some of the tax aspects of being married in this article. Please feel free to contact me to discuss your unique situation.