As if the process of getting married isn’t complex and difficult enough, prospective spouses also need to take income tax considerations into account before tying the knot.
That’s particularly true for those who plan to marry late this year or early next year. From the federal income tax standpoint, those marrying next year may come out ahead by deferring or accelerating income, depending on their circumstances. Others may find it to their advantage to defer a year-end marriage until next year.
The timing issue—whether to marry this year or the next—may be particularly relevant for same-sex couples in light of the recent decisions by the Supreme Court. In Obergefell v. Hodges, the Supreme Court held in June that same-sex couples may now exercise the fundamental right to marry in all states. Previously, in the 2013 decision U.S. v. Windsor, et al, the Supreme Court struck down section 3 of the Defense of Marriage Act, which had required same-sex spouses to be treated as unmarried for purposes of federal law. The IRS subsequently issued guidance on this decision in which it determined that same-sex couples legally married in jurisdictions that recognize their marriages will be treated as married for federal tax purposes, regardless of whether their state of residence recognizes their marriage.
Background: The amount of income subject to the two lower tax brackets (10 percent and 15 percent) for married taxpayers filing jointly is exactly twice as large as the amount of such income for single taxpayers. However, the tax brackets above 15 percent cover a larger total amount of income for two single taxpayers than for two taxpayers who are married.
For example, in 2015, two unmarried taxpayers can each have $90,750 of taxable income before they hit the 28 percent bracket. On the other hand, if they are married, their combined taxable income over $151,200 will be taxed at a rate starting at 28 percent. Also, on a joint return, the 33 percent rate begins at $230,450, the 35 percent rate starts at $411,500, and the 39.6 percent rate starts at $464,850.
On the other hand, two unmarried taxpayers with substantially equal amounts of income can have as much as $378,600 ($189,300 × 2) of taxable income before being in the 33 percent bracket, $823,000 ($411,500 × 2) before being in the 35 percent bracket, and $826,400 ($413,200 × 2) before being in the 39.6 percent bracket.
Thus, there is a marriage penalty when, for example, married taxpayers’ combined income will cause part of their income to be taxed at a rate above 25 percent, when none of their income would be taxed at a rate above 25 percent if they filed as single individuals.
A taxpayer’s marital status for the entire year is determined as of Dec. 31. A taxpayer who gets married (or divorced) on that date is treated as if he were married (or single) all year long.
Marriage-penalty implications for year-end planning: Those eager to tie the knot as soon as possible should keep in mind that deferring the marriage until next year could save substantial tax dollars. And, where two unmarried taxpayers with substantially equal amounts of taxable income have solidified plans to marry next year, it may pay to accelerate income into this year rather than attempt to defer it until next year.
Illustration 1: John and Jess are planning to get married. Jess expects to have $300,000 of taxable income in 2015, and John expects to have $250,000. Their combined taxable income for 2015 will be $550,000. If they get married before 2016, and file a joint return for 2015, they will owe income taxes for 2015 of $163,715.90. If they delay their marriage until 2016, then for 2015, Jess will owe taxes of $82,606.25, and John will owe $66,106.25, for a combined tax of $148,712.50. This will be $15,003.40 less than they would owe if they married in 2015 and filed a joint return for 2015.
If John and Jess married in 2015 and filed separate income tax returns for 2015, John would owe income taxes of $71,957.95 on taxable income of $250,000, and Jess would owe income taxes of $91,757.95 on taxable income of $300,000. The combined amount they would owe would be $163,715.90, the same amount they would owe if they filed a joint return for 2015.
Marriage bonus implications for year-end planning: If only one of the prospective spouses has substantial income, marriage and the filing of a joint return will usually save taxes, thus resulting in a marriage bonus. In such a case, it will probably be better to defer income until next year if they will be married next year, or, if they are in the planning stage, to accelerate the marriage into this year if feasible.
Illustration 2: Same facts as in Illustration 1, except John expects to have taxable income of $25,000 in 2015, and Jess expects to have taxable income of $525,000. If they get married before 2016, and file a joint return for 2015, they will owe income taxes for 2015 of $163,715.90. If they delay their marriage until 2016, then John will owe income taxes of $3,288.75 for 2015, and Jess will owe income taxes of $164,269.05. Their combined income taxes will be $167,577.80 in 2015 if they file as single taxpayers, or $3,841.90 more than they would pay if they filed a joint return for 2015.
Depending on the taxpayers’ income, marriage and the filing of a joint return may not only result in a marriage bonus because of the tax-rate structure, but also produce tax savings in the form of bigger deductions based on adjusted gross income, or smaller AGI-based tax hikes. For example, for 2015:
• The AGI phaseout for making deductible contributions to traditional IRAs by taxpayers who are active participants in an employer-sponsored retirement plan begins at $98,000 of modified AGI (MAGI) for joint return filers and the deduction is phased out completely at $118,000 of MAGI. For single taxpayers, the phaseout begins at $61,000 of MAGI and is phased out completely at $71,000 of MAGI. And for a married taxpayer who is not an active plan participant but whose spouse is such a participant, the otherwise allowable deductible contribution phases out ratably for MAGI between $183,000 and $193,000.
• Individuals may take an above-the-line deduction for up to $2,500 of interest on qualified education loans, but the amount otherwise deductible is reduced ratably at modified AGI between $130,000 and $160,000 on joint returns, and between $65,000 and $80,000 on other returns.
• The 3.8 percent investment surtax applies to the lesser of (1) net investment income or (2) the excess of MAGI over the threshold amount of $250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for other taxpayers.
• The additional 0.9 percent Medicare (hospital insurance) tax applies to individuals receiving wages with respect to employment in excess of $250,000 for married couples filing jointly, $125,000 for married couples filing separately, and $200,000 for other taxpayers.
Besides the above considerations, couples thinking of marrying should consider there are various tax rules that apply differently to related parties, and that, when one marries, his spouse becomes a related party. For example, there is a rule that doesn’t allow someone to recognize a loss on a sale to a related party. Using that example, a couple may want to consider having an intra-couple sale occur before the marriage takes place.
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