How is your bracket?
Did you think I was going to talk about sports? Hahaha. Both of the universities I attended (grad & undergrad) were in the Sweet 16, but I only watched part of one game. I have a lot of interests, but sports just isn’t one of them. No, I’m talking about tax brackets!
Leigh made a comment on my last post about how marriage affects taxes, and could play into her future (hypothetical!) decision about whether or not to marry. This took me slightly by surprise, because it has been a long time since I thought about how our marriage affects our bottom line from a tax perspective. In my mind, the main implication it had on my taxes was that they became complicated. I used to file a simple 1040EZ until we got married! T’s was constantly earning income in other states / contracting income / grad school funding that sometimes had taxes withheld and sometimes didn’t.
It also surprised me because it was not something I considered at all in our pre-marriage days. I never considered not getting married. She points out, there aren’t huge benefits. There’s health insurance, but if you both work, you may not save much money there. There’s kids… but you don’t really have to be married to have them and raise them. Then comes down to the more rare things: being let into the hospital, inheriting a deceased spouses money, and maybe some other things. It made sense, I just hadn’t really thought of it from that angle. (Plus, T helped my tax bill when we first married.)
Doing some simple math that is somewhat representative of our marriage, I want to see a) how much we’re paying and b) if filing separately might help. We never considered separate filings, but a quick Google told me that if you have roughly similar incomes, it could save you money. We are no longer eligible for a Roth IRA, so I don’t see any drawback to filing separately.
To keep it simple, let’s say we make the exact same salary of $130k, and we each save 17,500 in a pretax 401k. The standard deduction is $6,200 per a person, no matter what, and the personal exemptionis about $4000. We typically can’t find any other deductions, so we have $102,300 in taxable income each.
As two single people, we’d each pay $28,896. Or $57,792. OMG, that is so much money!
Married filing separately, we’d each pay $29,344 again. I guess there is no reason to file separately for us under these assumptions.
So, at our current incomes, it isn’t a big deal. I mean, nearly $1,000 is a good chunk of money, but calculating that didn’t make me want to cry.
Once you start having more of your income in the higher and more uneven brackets, it would make a bigger difference. For another example, if you have $200k of taxable income per a person, you are looking at about $4k each (Federal + CA). For $150k,you each pay roughly $2,200 more.
Thoughts? Can any of my friends from other countries tell me how it works in your country? Would you consider delaying or eliminating legal marriage with someone you intended to be your life partner to avoid a marriage tax?