I’ve said this before, but it’s worth repeating: I love personal finance. Everything about it excites me– the fundamentals, insurance, investing, estate planning, etc. At my core, though, I’m a tax guy. I first fell in love with tax my second year of law school after taking basic income tax and volunteering at a tax clinic.
Because of my passion for the subject, a lot of the financial issues that first come to mind when I think about my and Ben’s financial future revolve around taxes. And one of the things I’ve looked forward to the most is filing a joint federal income tax return! (I’ll take a second for some of you to stop laughing.) Not only does filing a joint federal return symbolize the ultimate melding of finances, it shows that you have a recognized relationship, which I’m sure a lot of people want to do.
The Marriage Penalty and Marriage Bonus
For those of you as excited as me to file joint returns, you should know about two important tax concepts concerning the married filing jointly status – the Marriage Penalty and the Marriage Bonus. The marriage penalty occurs when a couple pays more income tax filing jointly than they would if they had filed as individuals. Conversely, a marriage bonus arises if a couple pays less tax filing jointly than they would if they were not married and filed singly.
Say Ben and I earn $100,000 and $80,000 respectively in 2013. Without any other adjustments, deductions, or credits, Ben would pay $18,493 in income tax if he filed as a single person, and I would pay $13,429. Combining those amounts, we would pay $31,922 as a household. But if we filed a joint tax return (married filing jointly or MFJ), we would owe $32,266 in tax. So we are “penalized” $344 (or a 16G iPad mini) in tax merely for being married and filing a joint return.
This discrepancy goes up or down depending on adjustments, deductions, and credits. Each person’s income also makes a difference. As a general rule, the larger the income disparity between the two spouses, the more they would save by filing jointly.
So let’s say Ben and I earn $100,000 and $20,000 respectively. Individually, Ben would still pay $18,493, and I would pay $1,054 in tax. Together we pay a total of $19,547. However, by filing together, we only pay $16,858 – a difference of $2,689 (that’s a few iPads).
Those of you that take financial considerations into account when determining when to get married, make sure to keep the marriage penalty and bonus in mind. You should also know that once you officially marry, you can no longer file as a single person; you have to file married filing jointly or married filing separately. (The married filing separately status innately has its disadvantages.) Regardless , you might find out that it’s better to take the plunge sooner rather than later.