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Thursday, February 2, 2023

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Taxes After Marriage: Navigating the Confusing Consequences

Some two-income couples may owe more in taxes — just because they get married — than they would together if they all remained single. As unromantic as this may sound, some couples planning to get married this month or next may find that postponing the official ceremony until 2023 could yield significant tax savings this year. But in other cases, some couples getting married may find they owe less on a combined basis than if they were still single.

These odd tax twists have long been known as the marriage penalty and the marriage bonus. They persist in many cases and to widely varying degrees, despite tax changes made in 2017, including major relief for millions of married couples. Marriage penalties “usually occur when various tax provisions — exclusions, deductions, credits and tax brackets — for married couples are not double the equivalent amounts for single filers,” Chenxi Lu and Janet Holtzblatt say on the Urban-Brookings Tax Policy Center website. . .

The penalty can be particularly high for some high-income couples, each of whom has large and roughly comparable incomes, but it can also hit lower-income taxpayers. And many tax provisions can play a role in the amount and scope of the fine, says John Buchanan of Wolters Kluwer Tax & Accounting US. Here are some:

Deductions and Other Factors

Tax brackets: The 37% federal income tax bracket for married couples filing jointly is not twice the size of the single person tax bracket, says Stephen W. DeFilippis, owner of DeFilippis Financial Group, an asset management and tax firm in Wheaton, Illinois, and also a registered agent, meaning he is authorized to represent taxpayers at all levels with the IRS. For the 2022 tax year, the top federal income tax rate of 37% applies to single people with incomes over $539,900. For married couples filing jointly, it applies with incomes over $647,850.

Tax credit: Low-income workers could be hit with a marriage penalty because of the intricacies of the Earned Income Tax Credit, or EITC, Mr. DeFilippis says. This complex facility is designed to help large numbers of workers and lower-income families.

Net power losses: With stock prices falling year-to-date this year, many investors may have larger realized capital losses than their realized capital gains. In that case, they can typically deduct as much as $3,000 a year from their net asset losses ($1,500 if married and filing separately) against wages and other income. That $3,000 limit is the same for singles and joint filers. For example, two singles can deduct net estate losses of as much as $6,000, while joint filers are limited to as much as $3,000.

SALT deduction: For taxpayers who itemize their withholdings, the maximum deduction for state and local taxes (SALT) is $10,000 for both joint filers and singles. Thus, two singles can deduct as much as $20,000, but joint filers are limited to $10,000. (For those who are married but are filing separately, it’s $5,000 each.) This can be especially important for couples who specify and live in high-tax areas, such as New York City, California, and New Jersey.

Social Security: The base amount for calculating Social Security benefits tax is $25,000 for unmarried taxpayers and $32,000 for married couples filing jointly, according to Wolters Kluwer’s Mr. Buchanan.

Other singers: The tax burden on married couples may also be impacted by limits on mortgage interest deductions and a 3.8% net income tax that applies to many higher-income investors.

Place: Where you live can also play a role in how married couples are taxed, says Janelle Fritts, a policy analyst with the Tax Foundation in Washington, DC. For more information, see her report entitled, “Does Your State Have A Marriage Penalty?”

Archive status

Married couples can choose to file jointly or as “married persons filing separate returns” from their spouse. Most married couples file jointly because that is usually more favorable for tax purposes. Filing separately from your spouse can be beneficial in certain circumstances, including if one spouse has a significantly lower income than the other and has very large medical expense deductions. Filing separately can also be a smart move if you suspect your spouse is a tax evader and you don’t want to be held responsible for that person’s taxes, says Bryan Skarlatos of the law firm Kostelanetz LLP in New York City.

How can a couple owe less because of marriage?

The answer again varies widely and depends on the details of each case. But an example would be a couple where one spouse has much more income than the other, or where one spouse takes all of the income home, says Buchanan. He gives this hypothetical example: Suppose one taxpayer has an income of $170,000 this year and the other has $30,000. If they were married and filing together, they would owe about $3,800 less than if they had all stayed single, he says.

In other cases, the bonus can be much larger, says Mr. DeFilippis. For example, consider a hypothetical case where one person has $200,000 in payroll income for this year and the other has zero. The marriage bonus would be about $10,550, he says. “Usually, the more unequal the income is between the two, the higher the marriage bonus,” he says.

Series I savings bond update: Treasury Series I savings bonds, which are guaranteed by the government and offer important tax benefits, still look attractive, even if the recently revised rate is not as high as before. The Treasury recently announced that the initial annualized interest rate on new Series I savings bonds sold from November of this year to April 30 of next year is 6.89%. I wrote about this topic earlier this year. See the Treasury website for more details.

Charity reminder: Stop procrastinating if you are considering taking advantage of a popular technique known as qualified charity distribution. Friends have reminded me that it can take longer to execute than you may think. In a typical case, an investor age 70½ or older can transfer as much as $100,000 per year directly from a traditional IRA to qualified charities without having to include the transfer as income. (Note: donor-advised funds are not considered eligible for this provision.) The transfer counts toward the taxpayer’s minimum distribution requirement for that year. Make sure the transfer goes directly to the charity, not the IRA owner, says Eric Smith, an IRS spokesperson. The IRS recently released a helpful overview on this topic.

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