by Gregory S. Dowell
September 25, 2018
We previously had written about the tax trap that often occurs when two people get married, resulting often in an unanticipated balance due when the first joint tax return for the couple was filed. While President Trump’s Tax Cuts and Jobs Act (TCJA), changed the dynamics somewhat, it is still worthwhile to put pen to paper before saying “I do”. Prospective spouses have the opportunity to save money by taking 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. As this article explains, from the federal income tax standpoint, some individuals marrying next year may come out ahead by either deferring or accelerating income, depending on their circumstances. Others may find it to their advantage to defer a year-end marriage until next year.
For some quick background, a “marriage penalty” exists whenever the tax on a couple’s joint return is more than the combined taxes each spouse would pay if they weren’t married and each filed a single or head of household return. Before President Trump’s TCJA, only the 10% and 15% married filing jointly brackets were set at twice that of the singles bracket, and so the marriage penalty effect on joint filers applied in the brackets above the 15% bracket. Beginning with the 2018 tax year, however, the TCJA set the statutory tax brackets for marrieds filing jointly-through the 32% bracket-at twice the amount of the corresponding tax brackets for singles. As a result, the TCJA eliminated any tax-bracket-generated marriage penalty effect for joint filers where each spouse has roughly the same amount of taxable income-through the 32% bracket.
For example, if two individuals who each have $150,000 of taxable income file as single taxpayers for 2018, each would have a tax bill of $30,289.50, for a combined total of $60,579. If they were married, their tax bill as marrieds filing jointly would be $60,579, exactly the same amount as the combined total tax they’d pay as single taxpayers.
Because the 35% bracket for marrieds filing jointly isn’t twice the amount of the singles 35% bracket, the marriage penalty effect will still apply to joint filers whose income falls in that bracket. Two single taxpayers may each have $500,000 in taxable income, for a combined total of $1,000,000, without having any of it taxed higher than 35%. However, for marrieds filing jointly, the 35% tax bracket ends at $600,000 in taxable income, and each additional dollar of taxable income taxed at 37%. However, the most the marriage penalty can be for these joint filers under the new rate structure is $8,000 (which is the last $400,000 of income for which singles (at $200,000 each) would be taxed at 35%, but joint filers will be taxed at 37%).
Thus, where two high-earning unmarried taxpayers with substantially equal amounts of taxable income are planning for their marriage to take place either late this year or early next, it may pay from the tax viewpoint to defer the marriage until next year. As an example, if two individuals each have $600,000 of taxable income file as single taxpayers for 2018, each would have a tax bill of $187,689.50, for a combined total of $375,379. If they were married before the end of the year, their tax bill as marrieds filing jointly would be $383,379, or $8,000 more than the combined total tax they’d pay as single taxpayers.
If only one of the prospective spouses has substantial income, marriage and the filing of a joint return may save taxes, thus resulting in a marriage bonus. The bonus is the result of two factors: 1) the tax brackets for marrieds filing jointly cover wider spans of income than the tax brackets for taxpayers as singles; and 2) the taxable income of the lower-earning individual may not push the couple’s combined income into a higher tax bracket. In such a case, it will probably be better from the tax standpoint to accelerate the marriage into this year if feasible. Two examples will help illustrate this point:
Example 1: One individual has $180,000 of taxable income for 2018 and would pay $39,289.50 in tax if filing as a single person. Another individual has only $25,000 of taxable income and would pay $2,809.50 if filing as a single person. Together, they pay a total of $42,099 in federal income tax as single filers. If these individuals were married and file a joint return for 2018, the tax bill on their combined $205,000 of taxable income would be $37,779, or $4,320 less than they’d pay as singles.
Example 2: One individual has $300,000 of taxable income for 2018 and would pay $80,689.50 in tax if filing as a single person. Another individual has only $30,000 of taxable income and would pay $3,409.50 if filing as a single person. They pay a total of $84,099. If these individuals were married and file a joint return for 2018, the tax bill on their combined $330,000 of taxable income would be $68,979, or $15,120 less than they’d pay as singles.
Some other factors should also be taken into account when deciding if marriage and the filing of a joint return would be helpful or detrimental. For 2018, some examples are:
- The adjusted gross income (AGI) phaseout for making deductible contributions to traditional IRAs by taxpayers who are active participants in an employer-sponsored retirement plan begins at $101,000 of modified AGI (MAGI) for joint return filers, and the deduction is phased out completely at $121,000 of MAGI. For single taxpayers, the phaseout begins at $63,000 of MAGI and is phased out completely at $73,000 of MAGI. 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 $189,000 and $199,000.
- Taxpayers are allowed a $2,000 child tax credit for each qualifying child under age 17. The amount of the credit allowable phases out if modified AGI exceeds $400,000 for married joint filers, and $200,000 for all other taxpayers.
- 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 $135,000 and $165,000 on joint returns, and between $65,000 and $80,000 on other returns.
- The 3.8% investment surtax applies to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (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.
- For tax years beginning after 2017, taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. If taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction is subject to multiple limits based on the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid with respect to the qualified trade or business, and/or the unadjusted basis of qualified property held by the trade or business
- The additional 0.9% Medicare (hospital insurance, or HI) 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.
One final note: Besides the above considerations, couples thinking of marrying should consider that 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 taxpayer who is contemplating making a sale of property to his future spouse at a loss should consider having the intra-couple sale occur before the marriage takes place.