Avoiding marriage to save on taxes/loans

[RosieQ]

Hi Everyone. I'm looking for help with calculating the financial implications of getting married. I'm already engaged and am fully committed to my partner and we are planning a ceremony in April. However, after running some numbers I'm suspecting that getting an official marriage license may be extremely expensive for us and we are considering forgoing that for at least the short term. I'm having a hard time calculating the specifics for different taxes paid and takehome salary for single vs married filing separately (due to IBR loan repayent requirements). We are in CA and was hoping for some help with making the decision. Details:

Me: 33yo MD

K1 Partnership/ sole proprietor salary approx $300,000 will rise yearly for 4-5 years to 360,00 level and then be fairly steady

Max 401k- 54,000

Max HSA- 3,400

Self employed health insurance deduction approx 5000, Misc business deductions approx 5000

 

Partner: 34yo DDS, working in nonprofit

Employee salary approx $130,000 increase approx 3% per year (8% of salary additional by employer into 401k after first year)

Max 401k and 457 18/18= 36,000

We will be in California for state income taxes, no children and saving aggressively for at least 5 years and likely longer. The BIG complicating factor are loans. Partner has a massive amount of student loans, currently being fully paid for on a monthly basis as a separate part of her compensation agreement while on IBR with 4.5 years to go towards PSLF forgiveness. Joining finances as as married filing jointly will cause a huge uptick of student loan payments from totally covered by her yearly loan assistance to about 4k per month extra out of pocket, so we are looking at married filing separately vs single. Good idea to consider and thoughts on the financial implications? Ultimate plan would be to get rid of the loans, one or both of us move to part time over the years especially with kids and then will likely make sense for official marriage and filing jointly in the traditional manner. Thanks for the help!

[adventure]

To start, welcome! I'll offer these initial (but not comprehensive) thoughts:

1. There are some great advantages to marriage, not easily tied to a monetary value. (Varies based on person).

2. When I need to estimate things, I open a new return in TurboTax, enter everything and get a #. Then I tweak things, to see what changes.

3. Will her employer keep helping with loans if she is/isn't married? How many months/years until you could just pay them off?

[jz]

start here:

https://www.nytimes.com/interactive/2015/04/16/upshot/marriage-penalty-couples-income.htmlhttps://www.nytimes.com/interactive/2015/04/16/upshot/marriage-penalty-couples-income.htmlhttps://www.nytimes.com/interactive/2015/04/16/upshot/marriage-penalty-couples-income.htmlhttps://www.nytimes.com/interactive/2015/04/16/upshot/marriage-penalty-couples-income.htmlhttps://www.nytimes.com/interactive/2015/04/16/upshot/marriage-penalty-couples-income.htm

 

[jz]

OK the link doesn't work.    Google:  new York times marriage penalty.   they have an interactive chart.

[jz]

also, the article is dated april 15, 2015.

[jz]

or go to " tax foundation marriage penalty" dated April 2015

[RosieQ]

Thanks. That's helpful and something I was looking at. Married filing jointly has us at a bit over $8000 penalty to start and $12,000 penalty with one child. However, I think that married filing separately will be even worse.

[DMFA]

MFS is awful.  The huge tax hit you'll take from having so much more of your higher income taxed at the higher bracket would make it not worth it.  You'd be put into the 39.6% bracket, and your partner into the 33% bracket, instead of 33% and 28% respectively while single, or the 35% bracket where you'd be if you did MFJ.  Plus, you are ineligible for several useful credits and deductions.

Are you actually going to be on the hook for the loans, or are you committed to doing PSLF?  If you're actually going to pay them, then just refi to lowest rate and pay ASAP.  Otherwise stick with PSLF.

The sad truth is that you'll pay more in taxes to be married, as well as higher student loan payments (unless you do MFS, in which case your taxes will be way higher - just look at the brackets).  So purely financially, you *may* be better of single.  If you plan on being "married" but not be legal spouses, then there can be a lot of roadblocks here that can't necessarily be taken care of with a series of legal contracts designating each other as POA, beneficiary, etc...this especially carries into the world of children, especially if you plan on adoption (though forgive me if I assume too much).

I do not know as much about these matters as you might, but only you can decide how much being legally married is worth to you and your partner, because you are right in your suspicion that it will cost you a higher amount in taxes and in loan repayment calculation.

[RosieQ]

DMFA wrote:

MFS is awful.  The huge tax hit you’ll take from having so much more of your higher income taxed at the higher bracket would make it not worth it.  You’d be put into the 39.6% bracket, and your partner into the 33% bracket, instead of 33% and 28% respectively while single, or the 35% bracket where you’d be if you did MFJ.  Plus, you are ineligible for several useful credits and deductions.

Are you actually going to be on the hook for the loans, or are you committed to doing PSLF?  If you’re actually going to pay them, then just refi to lowest rate and pay ASAP.  Otherwise stick with PSLF.

The sad truth is that you’ll pay more in taxes to be married, as well as higher student loan payments (unless you do MFS, in which case your taxes will be way higher – just look at the brackets).  So purely financially, you *may* be better of single.  If you plan on being “married” but not be legal spouses, then there can be a lot of roadblocks here that can’t necessarily be taken care of with a series of legal contracts designating each other as POA, beneficiary, etc…this especially carries into the world of children, especially if you plan on adoption (though forgive me if I assume too much).

I do not know as much about these matters as you might, but only you can decide how much being legally married is worth to you and your partner, because you are right in your suspicion that it will cost you a higher amount in taxes and in loan repayment calculation.

Click to expand...

Thanks. We are indeed committed to PSLF. She is 5+ years in and as a dentist making only around $130,000 has almost $480,000 of debt plus interest at this point. Would could join forces, move to a no income tax state, and work a ton in private practice for several years if we had to pay it back, but at this point 4 years of "free" student loan payments followed by complete forgiveness while she lives and saves with the 130k seems to be the vastly better alternative.

I think we would both prefer to be married. However, if it leads to 15-30k per year in opportunity cost I'm not sure that would be worth it. Aside from some legal benefits I think that marriage is really a personal commitment and state of mind.

 

Edit: I happen to have no debt. Lucky me! Though she brings more than enough for the both of us unfortunately.

[DMFA]

RosieQ wrote:

DMFA wrote:

MFS is awful.  The huge tax hit you’ll take from having so much more of your higher income taxed at the higher bracket would make it not worth it.  You’d be put into the 39.6% bracket, and your partner into the 33% bracket, instead of 33% and 28% respectively while single, or the 35% bracket where you’d be if you did MFJ.  Plus, you are ineligible for several useful credits and deductions.

Are you actually going to be on the hook for the loans, or are you committed to doing PSLF?  If you’re actually going to pay them, then just refi to lowest rate and pay ASAP.  Otherwise stick with PSLF.

The sad truth is that you’ll pay more in taxes to be married, as well as higher student loan payments (unless you do MFS, in which case your taxes will be way higher – just look at the brackets).  So purely financially, you *may* be better of single.  If you plan on being “married” but not be legal spouses, then there can be a lot of roadblocks here that can’t necessarily be taken care of with a series of legal contracts designating each other as POA, beneficiary, etc…this especially carries into the world of children, especially if you plan on adoption (though forgive me if I assume too much).

I do not know as much about these matters as you might, but only you can decide how much being legally married is worth to you and your partner, because you are right in your suspicion that it will cost you a higher amount in taxes and in loan repayment calculation.

Click to expand…

Thanks. We are indeed committed to PSLF. She is 5+ years in and as a dentist making only around $130,000 has almost $480,000 of debt plus interest at this point. Would could join forces, move to a no income tax state, and work a ton in private practice for several years if we had to pay it back, but at this point 4 years of “free” student loan payments followed by complete forgiveness while she lives and saves with the 130k seems to be the vastly better alternative.

I think we would both prefer to be married. However, if it leads to 15-30k per year in opportunity cost I’m not sure that would be worth it. Aside from some legal benefits I think that marriage is really a personal commitment and state of mind.

 

Edit: I happen to have no debt. Lucky me! Though she brings more than enough for the both of us unfortunately.

Click to expand...

Yeah. Those are very reasonable and correct perspectives, imo.  I would just make sure you've completely looked into the effect of your legal marriage status on your specific plans for your family, especially as it pertains to parenthood.  If not being married might hinder any of those goals, then it might well be worth $15-30k/yr for you.  I hate to say it, especially on a financial board, but there is more to life than money...

[RosieQ]

DMFA wrote:

Yeah. Those are very reasonable and correct perspectives, imo.  I would just make sure you’ve completely looked into the effect of your legal marriage status on your specific plans for your family, especially as it pertains to parenthood.  If not being married might hinder any of those goals, then it might well be worth $15-30k/yr for you.  I hate to say it, especially on a financial board, but there is more to life than money…

Click to expand...

You are totally right, and we might go ahead and just sign the marriage license. I just thought it would be prudent to at least clearly assess the cost of doing so. My fiancee actually brought this up and mentioned that retiring earlier or taking some fantastic vacations could likely help reinforce the relationship to a similar degree or better than a legal contract if we looked at the savings another way.

[RosieQ]

After searching for months I think I may have found a better calculator at http://www.tax-rates.org/income-tax-calculator/

This allows payroll taxes, self employed etc to be broken down.

According to the calculator it looks like on my 300k income taking maximum deductions the Single to married filing separately penalty would be $5362 for me. For the fiance, only a penalty of $256.

$5618 penalty to get married each year. Does that sound like a reasonable estimate? Not nearly as bad as I was expecting.

[Miss Bonnie MD]

Didn't read all the comments, but I personally don't think legal marriage is necessary, at least immediately. I wrote a blog post about it, although my situation/reasons fore delaying legal marriage are a little different. I know many couples who are "married" to the public - had the wedding, etc, but never signed the document.

In terms of the "rights" of a spouse, you just need some paperwork in place to protect you and him. We are in the process of getting LWT, living wills, POAs, HCPs done for this purpose and we are expecting our first child later this year so all the more reason to make sure everyone is protected.

 

https://missbonniemd.com/i-do-is-a-legal-contract/

[Craigy]

Just wait for Trump to get rid of the marriage penalty

If I could have convinced my wife not to get legally married, I would have.  We would have avoided the marriage penalty and had her eligible for PSLF.  But explaining that to her was a pretty unsexy proposition, and she didn't want to even think about things like taxes, student loan payments, etc.

The benefits of marriage for you IMO aren't that great.  You can accomplish a lot of things with powers of attorney and good estate planning.  Most states have gotten rid of their ****************************************** language for children born unwed parents.  Yeah your auto insurance might be marginally cheaper.  I'm not sure what else.

[RosieQ]

Craigy wrote:

Just wait for Trump to get rid of the marriage penalty ?

If I could have convinced my wife not to get legally married, I would have.  We would have avoided the marriage penalty and had her eligible for PSLF.  But explaining that to her was a pretty unsexy proposition, and she didn’t want to even think about things like taxes, student loan payments, etc.

The benefits of marriage for you IMO aren’t that great.  You can accomplish a lot of things with powers of attorney and good estate planning.  Most states have gotten rid of their ****************************************** language for children born unwed parents.  Yeah your auto insurance might be marginally cheaper.  I’m not sure what else.

Click to expand...

Ironically this post was inspired by her. I mentioned that there would be a marriage penalty in our case but wasn't sure exactly the magnitude and her first thought was "why not get married then, let's just do the ceremony instead." Maybe I should be worried

Not to be too political but the Republican house/senate and White House haven't been particularly effective with putting out meaningful legislation on the taxes/healthcare front. While I would be worried about overall implications to our society with a large Republican tax reform bill I suspect it would be a short term net bonus for our particular financial situation if it were to come about.