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How is your bracket?

March 30, 2014

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!

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Married filing jointly, we’d pay $58,688 for the two of us, or $29,344 each.  That is $448 MORE than if we were single.  

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Married filing separately, we’d each pay $29,344 again.  I guess there is no reason to file separately for us under these assumptions.

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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.

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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?

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11 Comments leave one →
  1. March 30, 2014 10:13 pm

    My understanding is that the tax system evolved to give a marriage tax benefit to couples with disparate incomes (i.e. $200K + $50K) and a marriage tax penalty to couples with similar incomes (i.e. $130K + $120K). So it make sense that in your example you had a slight marriage penalty. I never actually calculated out our marriage benefit/penalty and honestly haven’t thought much about it. If, for example, I’d have to pay an extra 30% of my income to be married, I guess I would consider the tax ramifications more carefully. But like you said, I’m happy to be married for the non-financial benefits such as hospital visits, right to make healthcare decisions in case of emergencies, etc.

    • March 30, 2014 10:22 pm

      Right, and even for the $200k taxable income example, the difference is ~2% of the taxable income… which isn’t all that much. It is something to think about, but it wouldn’t be enough to sway me.

      I think the way the tax code works makes sense (at least for this particular thing…), but I was kind of curious how it was affecting me.

  2. Law School Debt Monster permalink
    March 31, 2014 12:11 am

    I’m living overseas and my husband isn’t American, so it’s crazy to see all of this. My tax return, prepared by PWC, I could never do it myself is probably an inch thick with all of the special forms, foreign earned income exclusion, housing exclusions, extensions, etc you have to fill out over here. But the one benefit is that there aren’t any income taxes in the country where we are living. I have to admit, taxes are putting a definite question mark on our possibly eventual return to the US.

  3. March 31, 2014 8:57 am

    Our taxable income was more like $285k combined in 2013 and our marriage tax penalty would have been about $5k. This year, it should be about $6.5k as a penalty. My boyfriend is in agreement with me that paying that much extra in taxes is silly (for now) 😉 We would be pushed up to the 33% tax bracket by getting married though and we are both in the 28% tax bracket single, plus I am itemizing single, but wouldn’t married since I’m itemizing about $10k/year.

    • March 31, 2014 8:58 am

      The “double housing tax” is more like $20k a year though and that makes a much bigger difference than the taxes.

    • March 31, 2014 11:06 am

      Definitely makes sense, esp. since there is no driving factor pushing for marriage (kids, a general desire to be married, whatever). The income distribution between people must make a difference (or your state), because I estimated only $4.4k for a $300,000k joint taxable.

      I hope you don’t think I was trying to criticize your choices, I was just seriously worried we were losing out on massive amounts of cash by being married.

      Ah, but these are good problems to have to avoid, aren’t they? 🙂

      • March 31, 2014 11:51 am

        I’m saving about $1k in taxes by itemizing and I would lose that if we got married. That is the difference between your $4.1k and my $5k number.

        Oh I definitely don’t think you were criticizing my choices! I think it might come to a point where being married is worth the $6k/year, e.g. estate taxes. But for now, it isn’t.

        They are definitely good problems to have to avoid! 🙂

        There’s also the medicare tax that we would hit married, but not single. It starts at $200k single and $250k married, which we are under single and over married.

        • March 31, 2014 9:08 pm

          That makes sense. You can still itemize, but I guess it wouldn’t make sense unless he also had a mortgage or some other compelling reason to itemize.

          Yes, no reason to rush – living together is probably the most fun step to take, IMO. I mean, marriage is great, but a wedding didn’t fundamentally change my relationship.

  4. March 31, 2014 1:56 pm

    Mmmm pretty sure there’s no such thing here. Taxes are really simple. Depending on the penalty absolutely, I might consider delaying marriage.

  5. April 5, 2014 6:05 am

    I think I may have missed if you said how you calculated things. Where did you get this snazzy calculating chart? We’re getting married this year, so I think next year we’ll start filing as married. We make similar salaries, so we’re assuming we’ll be hit with the “marriage penalty”. This post is a good reminder that I should change my withholding documents for this year since marriage applies for the entire year (so weird).

    I do know a coworker who lamented that he should have waited until the next year to get married (he got married in November) because then he wouldn’t have been hit with the marriage penalty for that entire past year.

  6. April 6, 2014 2:34 pm

    Many other countries just charge individual taxes an not couples taxes. There is no way to have:1. Progressive taxes, 2. Treat all equally earning individuals the same, and 3. Treat all equally earning families the same. You get 2/3 at best.

    We’ve always had a marriage penalty, but I’m a romantic and don’t mind paying it. Since it’s a sunk cost, I prefer not to think about it.

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