In Part 1 of this series, we met a young lawyer who is thinking of marrying her boyfriend, but is concerned about taxes. In Part 1, we compared filing as married-joint with filing as married-separate and found that there is really not much difference, but married-separate may be slightly worse. However, what if the young couple decides to delay getting married? Would you be surprised to find out that by delaying their wedding they could spare themselves paying $60,000 in taxes? (Yeah, you read that right - $60,000!). Read on below.
Married-Joint vs. Single
Let's compare the tax liability of our young lady lawyer if she and her boyfriend file as married-joint as opposed to single. Let's use TurboTax's tax caster again. We noted in the previous post that if they filed as married-joint, then they each owed $47,817. However, when we switch the filing status to single, their tax liability DECREASES to $43,171 - that's a difference of $4,646 for a single year. For each of them - a total of $9,292 for the couple! Welcome to the "marriage penalty"!
The marriage penalty arises because at higher income rates, the tax brackets for married-joint are less than twice that for single. For example, single filers pay 28% up to about $172K and then must start paying 33% - while married-joint pays 28% only up to $209K, instead of up to $344K, which would be double the single bracket.
Returning to the case at hand, that's a considerable amount of extra tax ($9,300-ish) that the lawyer and her boyfriend will be having to pay for the privilege of being married - and they will have to pay that amount, or more, each and every year that they are married (and both continue to work - more on this later).
Now, some would no doubt be scandalized that one would even consider tax planning when it comes to getting married (no doubt because they equate the emotion of "love" with the highly government-regulated contractual act of "marriage".) However, $9,300/year is a very considerable sum of money - especially when one is still paying off student loans - as our young lawyer and her boyfriend are.
Also, please note that this $9,300 is going to get bigger as their salary increases. For example, assuming that she went to law school after undergrad, spent 3 years there, and is now a third year associate, she is probably about 28 years old. It seems like many of the female associates that I know target 32 as their age to have kids. By the time that she is 32, assuming that her and her boyfriend are lucky enough to be able to keep working at their law firms and moving up, their marriage penalty could be $15,000/year.
Thus, assuming that she wants to have a child at 32 (and then stay home - more on this later), delaying their marriage until they are 32 could save her and her boyfriend about a combined $60,000 - more than enough to pay for the wedding - maybe even twice over- and certainly enough to make a huge dent in the student loans. If they delay having kids further, then the savings would be even greater.
For those of you who may initially have sniffed at the young associate's concerns with regard to the increased taxes that she and her potential husband would have to pay, I hope that a large number like $60,000 is enough to show you that her concern is real. Also, recall that we are taking about a young associate who 1) has very little assets, 2) is far in debt with student loans, and 3) looks around at the record number of layoffs and recognizes that her legal job could vanish at any time - it's not reliable, lifetime employment by any means. In this situation, I think that she is acting very responsibly.
If you think otherwise - if you are one of the "don't bother considering it because something will work out" crowd, then I invite you to go and tell that to the record number of lawyers and law students without a job right now - many of whom are crushed by student loan debt that they can never repay, and will eventually be deducted from their social security. I would advise that you make sure that your estate planning is up to date before having that conversation.
In Part 3 we will take a look at the impact of having a child on the associate's taxes.