Today’s guest post comes from Kate, a tax lawyer. Since entering the workforce, Kate has been enjoying a six digit increase in her net worth every year from aggressive saving, sensible investment strategy and efficient tax planning. In her free time, Kate shares tax saving and money tips on her blog Tax Optimized Investment to help people save on taxes and reach financial independence.
Without further ado, here’s Kate’s excellent guest on the topic of the marriage tax:
I constantly hear people talking about how getting married can help them save on taxes.
But is it true? Are marriage tax benefits really a myth?
If you also think that getting married will help you save on taxes, or are curious about the tax implications of getting married, read on!
I will first talk about the negative tax implications of getting married.
A lot of newlyweds find out to their surprise that they are subject to the so called “marital penalty.”
Marital penalty refers to the fact that the combined tax amount paid by a couple after they get married is higher than the combined amount they pay when they were single. This happens mostly to couples who are both working and don’t have kids.
Let’s take a look at why this happens.
If you look at the following tax brackets for 2016, you’ll notice that the brackets for married filing jointly is not double that of single filers for every income range.
For example, if you and your spouse each make $100,000, when you were single, each of you will be in the 28% tax bracket, and you will not be in the 33% tax bracket until each of you start making $190,150.
However, once you get married and file jointly, since your combined income is $200,000 and over $190,150, both of you will be in the 33% income tax bracket, even though neither of you are making more, and the only thing that has changed is the fact that you got married.
The marital penalty can get even worse when you do not have kids, and therefore cannot take advantage of the child tax credit ($1,000 per qualified child) or tax exemption ($4,050 per child for 2016) for supporting your child.
Lower exemption and deduction phase out
Additionally, for singles, phase out for personal exemptions and itemized deductions begins at $259,400 adjusted gross income in 2016. However, for joint filers, the phase out begins at $311,300.
Lower threshold for net investment income tax and Medicare tax
The net investment income tax and Medicare tax will also be different. The threshold for net investment income tax and Medicare tax for singles is $200,000, but is $250,000 for joint filers.
Again, the filing threshold for joint filers is not double that of single filers.
Joint and several liability for tax
When you file jointly with your spouse, like most couples in the United States, both you and your spouse are jointly and severally liable for the tax.
“Joint and several liability” basically means that each of you will be responsible for the entire tax bill. So if your spouse decides to stiff Uncle Sam and runs off to Switzerland, you are on the hook for the entire tax bill.
However, it is not the end of the world for you. You can get the so called “innocent spouse relief” from the IRS, if you can show that you did not know about your spouse’s unreported income, and that it will be unfair for you to pay.
Next I will explain how getting married can help you save on taxes.
Higher deductions and exemptions
Getting married does give you the option of filing separately or jointly, though you no longer have the option to file as a single person.
Whether you should file as married or single, depends on whether you are married as of December 31 of that year. If you get married on December 31, even if you are single for the rest of the year, you should still file as married.
Filing jointly with your spouse can be beneficial. If you file jointly, you can claim two personal exemptions (one for each of you), as opposed to the one exemption when you filed as a single person.
You will also get a higher standard deduction. In 2016, married couples filing jointly are allowed a standard deduction of $12,600, while single persons and married filing separately are allowed a standard deduction of only $6,300.
Capital gain exclusion for the sale of your home
A lot of couples choose to buy a house once they get married. There are some tax benefits in that.
When you sell the house for a gain, if you are single, you can exclude up to $250,000 of gain from tax. However, if you are married, you can combine your and your spouse’s exclusion to exclude up to $500,000 of gain.
Does that mean some rich couples can just buy a bunch of properties and get the $500,000 tax exemption for each of their properties?
There is a requirement to get this benefit. That is you must have owned and lived in the house for a period aggregating at least two years out of the five years before the sale.
Unlimited tax free spousal transfer
You can make gifts of not more than $14,000 to each recipient every year without being subject to gift tax. Gift tax is imposed on transfers you make during your lifetime.
However, this limitation does not apply to gifts you make to your spouse. This means that no matter how much you give your spouse as a gift during your lifetime, you will not be subject to gift tax.
Are you aware of these tax consequences of getting married? If you are married, have you been able to save on taxes? Let me know in the comment below. I’d love to hear from you!