Marriage Penalty

[CaliMD]

Given the new tax bill, any new thoughts on the marriage penalty? I'm scheduled to get married next year. While we are going to have a ceremony for family and friends, we are unsure if we should get legally married.

Obviously there are legal, social and cultural benefits for marriage, however, I trust my ability (and my wife's, parent's and in-laws') to manage those. I'm asking purely for salaried tax benefits.  Currently, I'm a physician IC making about 250K in an S corp. I have a W2 salary of about 130K and take dividends of 60-70K. The rest is in my SEP and expenses. She is a W2 employee scheduled to make 300-350K next year. My salary is pretty stable, hers should increasing with bonus for the next two years.

My understanding is the marriage penalty is significantly less than before. Even if we make more than 600K in future years, the amount owed in penalty maxes out at 8K, which would be worth the other benefits. However, my concerns are with the Scorp and the SALT deductions. I could keep my W2 salary below the 157K limit, and benefit from the new laws. However, my partners income would put us clearly over the limit.

Also, the 10K SALT limit applies to both individuals AND families? We both live in California, and individually pay more than 10K in State taxes. Seems like a reason not to get married by itself.

Anything else I haven't thought about?

 

[ENT Doc]

You were set to get married before this bill was a thing. And now that the marriage penalty is improved upon you're second guessing that decision? You benefit in all the lower tranches as you move up to the bracket(s) where there is an actual penalty. MFJ has other benefits - credits, etc. I don't suggest allowing this affect your marriage decision.

[CaliMD]

I wasn't clear, it is actually the opposite. Previously we were going to get married informally, but were not going to have a legal marriage due to the penalty. Now we are definitely still doing the ceremony with family/friends, but considering a legal marriage as well, if there is a benefit.

I'm not sure what you mean by "You benefit in all the lower tranches as you move up to the bracket(s) where there is an actual penalty." I'm trying to compare filing separately in 2018 to married filing jointly in 2018, not to 2017 rates. While there is less of a penalty, I'm not clear there is a benefit with our taxes. There may be a benefit with the S-corp, but I don't understand that well currently.

I'm not sure how it could not effect our marriage decision. We have a financial plan together and are working towards that even now before we get married. Obviously, minimizing our tax burden is part of it.

[ENT Doc]

The brackets support single filing over married filing separately or MFJ, at least when you pass $600k. The new SALT deduction does appear to be a marriage penalty. Think about other stuff though, like liability planning, whose name the house will be in, etc. Good luck.

[beagler]

So your marriage penalty is 8000 max from tax brackets if you make 1M combined.

Plus 157k x.2 x.24 =7560 ( if your total business income is less than 157k but yours is more so will be phased out)

Plus salt deduction loss of 10000x 35%=3500.

So you’d not get married to save a max of around 20k but more likely about 10-15k per year of taxes? If joint income is going to be 700k and above I doubt it’ll make a difference long term. Spending and saving habits more important. Not getting divorced is far more important.

Respectfully, don’t let’s the tax tail wag the marriage dog. Does this reflect some other hesitancy to get married? Official marriage means something.

[Craigy]

I would be pretty tempted to remain unmarried if it was going to save money tax-wise.

In some states, a ceremony with an officiant and family and friends may make you legally married, whether you apply for the license or not.

Marrying but being unmarried for tax purposes is fairly uncharted waters in the income tax world.

[grp2c]

Other items to consider with the marriage penalty is:

-mortgage interest deduction is the same whether you filing as an individual or MFJ.  On a $1,500,000 mortgage, 2 individuals could split it and each use the deduction for a mortgage up to $750,000.

-child tax credit, as MFJ you might phase out of the credit, however if filing as 2 individuals, one individual might be able to get under the phase out limits

-HSA contributions, 2 individuals on the same health insurance plan but not married could potentially each contribute the max family annual contribution. https://www.benstrat.com/downloads/HSA-GPS_HSAs-and-Special-Family-Situations.pdf

Can anyone think of any other marriage penalty considerations?

Also, I would explore s-corp vs sole proprietor considerations with the 20% pass through deduction.  I think the sole proprietor will have a larger deduction at the same income because it's "qualified business income" will be higher.   I'm still unclear on this.   Also, you might consider large contributions to a defined benefit plan to get below the phase out limit.

[Lithium]

Craigy wrote:

I would be pretty tempted to remain unmarried if it was going to save money tax-wise.

Click to expand...

It's also easier to sell (and cheaper) than a pre-nup.

[amphora]

You're not the first to contemplate this. A couple of economists profiled in this article aren't married for tax reasons.
https://mobile.nytimes.com/2012/02/12/business/economics-of-family-life-as-taught-by-a-power-couple.html?referer=https://www.google.com/

All in all, from a financial perspective only there's a marriage penalty for taxes but a bonus for health insurance and estate planning.

[Miss Bonnie MD]

Marriage penalty tax decreases, but due to the cap on SALT + property (indirect marriage penalty, since separately can do 10K each, but married 10K). And by your handle you live in CA where SALT is high.

[The White Coat Investor]

I like PoF's suggestion in the other thread. Not only should you not get married, but you should each find someone who isn't working to marry. You know, just on paper.