17 tax tips to manage the marriage penalty

October 13, 2023 4:50 PM

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Financial advisors and tax professionals can help guide clients concerned about hits to their finances upon marriage by using an array of planning strategies.

"We obviously want to encourage people not to let the tax wag the dog," said Liting Chuang, a certified public accountant who's the director of tax planning for Menlo Park, California-based Bordeaux Wealth Advisors.

The spouses-to-be may face even more tax issues than most people might imagine, though. Financial Planning compiled the below list of tax tips relating to the so-called marriage penalty by speaking with Chuang and three other experts.

Their advice and that of other available research and analysis begins with the most well known area, income taxes, and extends into Social Security benefits, capital gains, several deductions, racial disparities and even the timing of a couple's wedding day. At its most basic root, the term "marriage penalty" simply refers to any aspect of personal finance in which a couple finds themselves at a disadvantage as two people compared to a single person.

FP came up with 17 different tips by speaking with Chuang, consulting many available guides to the marriage penalty and interviewing the following other CPAs and planners:

Amy Irvine, an enrolled agent and certified financial planner who's the founder of Corning, New York-based Rooted Planning Group;

Rupa Pereira, an EA and founder of Apex, North Carolina-based FWJ Planning; and

Robert Keebler, a CPA and partner with Green Bay, Wisconsin-based Keebler & Associates.

To see FP's list of 17 tax tips when planning for a marriage, scroll down the slideshow. For a deeper look at other tax strategies for clients' families, see "11 tax tips on mortgages and homeownership" or "Planning for the cost of continuing care retirement communities."

Brace for impact

Couples should first and foremost understand that a marriage will affect their taxes in some way, according to Pereira.

"Short of not tying the knot, there's little one can do to completely avoid the penalty," she said in an email. "But knowing how your taxes will change will definitely open doors for planning opportunities, from itemizing to pretax deductions to minimize the marginal tax rate increase in our progressive tax system."

Tax does wag the dog for some

Some couples get cold feet when they look at a potential marriage penalty, Irvine said in an email.

"Sadly, in some cases partners stay single," she said. "We are seeing more people do this by having a wedding celebration without the wedding. While this one breaks my heart, sometimes the math is more favorable."

When’s the wedding day?

One couple who worked with Keebler's team asked their accountant for help planning which date to get married a few years ago, he recalled. They were choosing between getting married on New Year's Eve or waiting one more day in order to be single for that last year to delay the penalty.

"We ran the numbers," Keebler said. "I think they got married on Jan. 1."

Maybe you’re actually getting a bonus

Among spouses in which one is earning "most of, if not all the income," the joy of their wedding day may spill over into additional celebration over their lower federal income tax bracket, according to an analysis by financial advisor lead generation and client matchmaking service SmartAsset. For example, a couple with combined income of $95,375 to $182,100 qualifies for the 22% federal tax rate, while an individual earning that much pays 24%.

"By filing jointly, they qualify for a lower tax bracket than they would have if they were single filers," according to SmartAsset. "This bonus is the opposite scenario of a marriage tax penalty."

Tax Cuts and Jobs Act changed the game

The 2017 tax law set all but the top federal income tax brackets at double the level for joint filers as compared to single people, so clients won't need to worry about that aspect of the marriage penalty unless they're making at least several hundreds of thousands of dollars a year, Chuang said.

"There's a marriage penalty, but from a general population standpoint it probably isn't as big of a hit as people think it is," she said.

Still a factor at the top

For those spouses whose income is on the higher end, they may still need to plan for a federal income tax hit, according to Irvine.

"If you look at the 35% tax bracket, the income range in that bracket for single is $231,250- $578,125; although the lower end is double for married couples, the upper end is not (married filing joint bracket is $462,500-$693,750)," she noted. "Therefore, if you have two high-income earners, some of your income may end up pushed into the 37% bracket, when, instead, if you were single, each would be in the 35% bracket."

Don’t forget about state income taxes

At least 15 states' income taxes assess a marriage penalty in which the brackets for joint filers are less than double those of single people, while seven others enable couples to sidestep the higher brackets by filing separately on the same return, according to the nonprofit and nonpartisan Tax Foundation.

"Married couples who file jointly under this scenario face a higher effective tax rate than they would if they filed as two single individuals with the same amount of combined income," the organization's "TaxEDU" glossary showed. "This non-neutral tax treatment is particularly harmful to owners of pass-through businesses, who pay taxes on their business income under the individual income tax system. Under a marriage penalty, married business owners are subject to higher effective tax rates on their business income than they would be otherwise."

Income taxes are only one aspect

Couples will likely see a tax impact from their marriage regardless of their wealth level, whether the penalty relates to their income or eligibility for credits or deductions, Pereira noted.

"It affects higher-income earners (where both are in similar income ranges)," she said. "Lower-income households are also affected when combined income phases them out of the earned income tax credit and reduces the refundability of the child tax credit. However, the [Tax Cuts and Jobs Act] reduced the impact of the penalty, even if certain states still impose a marriage penalty."

Social Security taxes

Social Security beneficiaries who get married could absorb a higher tax burden from their monthly checks, due to the low thresholds tied to their incomes, Chuang said. Joint filers whose combined income including their adjusted gross income plus nontaxable interest and half of their annual payments adds up to more than $44,000 must pay taxes on 85% of their benefits — compared to a threshold of $34,000 for single people, according to the Social Security Administration.

There are some "nuances of combined income" for clients to talk through with their advisor or tax professional, Chuang said. "Looking at your adjusted gross income pre-Social Security income would be a good gauge on how much is taxable."

Other potential penalties

When planning for their post-wedding lives, prospective spouses should keep in mind the unequal treatment of couples with respect to capital gains tax rates, exemptions to the alternative minimum tax and the limit of the deduction for state and local taxes, Irvine noted.

Large donations every other year to charities or a donor-advised fund can boost any couple's potential itemized tax deductions, she said. Using a "married, filing separately" status may also benefit couples "in some (rare) cases," but requires consulting with a tax professional about any potential lost credits from filing separately as married spouses, Irvine added.

Additional Medicare tax and the net investment income tax

Tax provisions of the Affordable Care Act piled on an additional marriage penalty to the factors facing couples in areas like Social Security, the earned income tax credit, the deduction for state and local taxes, the child adoption credit and limits on Roth IRA contributions, CPA firm Glickstein, Laval and Carris wrote in an analysis. Charges of 0.9% of wages for the additional Medicare tax and 3.8% on certain net investment income apply to single filers earning $200,000 per year and married people at only $250,000 annually.

"As a result, singles who each earn $125,000 to $200,000 can get hit with the extra tax after they marry," the accounting firm wrote.

Mortgage interest deduction impact

The ceiling of only the first $750,000 of a mortgage for individuals and married couples alike being eligible for the potential deduction for interest payments also belongs on the list of impacts from tying the knot, according to personal finance website Investopedia's summary of the marriage penalty. Its listing of "special considerations" includes the treatment of low-earning couples and high earners who take home roughly equal pay, the payroll and net investment income surtaxes, capital gains rates and the potential marriage bonus alongside the mortgage deduction.

"Suppose an unmarried couple buys a home in 2021 with a $1,500,000 mortgage attached," according to the website. "In this scenario, each taxpayer may deduct the interest on $750,000 of that mortgage debt. But if a married couple bought the same house, with the same mortgage terms, they may deduct the interest only on $750,000 of the mortgage debt, as a unit."

Public service loan forgiveness factor

While the federal government's public service loan forgiveness program carries no specific cap on incomes phasing out the benefits for any individuals or couples, spouses' combined earnings can affect the amount of a borrower's monthly expenses and the remaining liability in the ultimate cancellation of the debt after 120 payments, Chuang said.

She used the example of a couple in which one partner earns $500,000 a year from a tech company while the other gets $60,000 as a public school teacher. On a combined basis, the teacher would be stuck spending more each month in an income-driven payment plan.

"'Married filing separately' may be a good strategy for maximizing the forgiveness of student loans," Chuang said. "You may come out ahead, even though you're paying more income tax, if you look at the overall tax versus the cash outlay of the loan."

Marriage penalty policies

The tax impact of getting married raises questions about the goals and reasons for some of the differences in treatment between individuals and couples, according to Keebler.

"The marriage penalty is very real, and there's a real policy issue of whether there should be a marriage penalty," he said. "I think, historically, the law has recognized that a married couple could theoretically pay more taxes because they have less living expenses."

Racial disparities

A working academic paper released earlier this year by the Tax Policy Center, a joint collaboration between the Urban Institute and the Brookings Institution, followed the conclusions of other studies suggesting that Black taxpayers face a bigger marriage income tax penalty than white households. The Black spouses have closer earnings than their white counterparts and are more likely to have dependents, according to the research paper.

"We find that Black couples are more likely than white couples to experience an income tax penalty from marriage and to face higher penalties," researchers Janet Holtzblatt, Swati Joshi, Nora Cahill and William Gale concluded. "There is no perfect solution to the tax treatment of marriage, and the byzantine system that has emerged reflects policymakers' struggles to reconcile a variety of conflicting goals."

The findings "suggest the need to add one more consideration into the discussion: the impact on racial equity," they added.

The views of two other CPAs

Married taxpayers face a disproportionate phaseout of the income exemptions for paying educational expenses from the interest proceeds of certain bond products in addition to all of the other areas still relevant after the 2017 tax law, according to a paper by two CPAs writing in The CPA Journal in 2019.

"Removing the marriage penalty entirely may conflict with the social objective of reducing the inequalities between low- and high-income earners," Allen Rubenfield and Ganesh Pandit wrote. "Nonetheless, the authors support the argument that the marriage penalty is not only unjust but also unethical. While the authors do not believe that the marriage penalty harms the institution of marriage, as has been claimed by some of the past literature, it does seem questionable simply based on the issue of fairness. The simplest way to eliminate the marriage penalty is to have a single filing status that all taxpayers can use, which will also simplify tax filings in general while keeping the tax system progressive."

A helpful calculator

Couples can quickly check the federal income tax impact of putting a ring on it by using the "marriage calculator" developed by the Tax Policy Center.

"This calculator lets you create specific situations to see how much federal income tax two people might pay if they were to marry," according to the website. "It compares the taxes a married couple would pay filing a joint return with what they would pay if they were not married and each filed as single or head of household."