The income limits before tax deductions start phasing out are ~$260,000 for singles and ~$311,000 for married couples according to the IRS in 2019.
In other words, after making more than $260,000/$311,000, you won’t be able to deduct the full amount of your mortgage interest and property taxes. You will also be subjected to the Alternative Minimum Tax (AMT) as well.
In this post, I will demonstrate to you 1) why the government doesn’t believe in equality, 2) reasons why you shouldn’t get married if you plan to make a high income, and 3) how much you should strive to make every year as an individual or as a married couple.
It’s important everybody understands what type of financial limitations the government imposes so that you can optimize your lifestyle.
Income Limits Until Phaseouts Begin
If the government believed in equality, the government would allow married couples to earn up to $260,000 X 2 = $520,000 before deductions start getting phased out.
Unfortunately, the government believes that one spouse should either give up his/her $260,000+ job to earn just $51,000 ($311,000 is the income max for married couples – $260,000 is the income max per individual), or stop working altogether to be a home maker.
Think about the thousands of studious individuals out there who want to be lawyers, doctors, scientists, engineers, financiers, and entrepreneurs. The government is telling them that as a reward for their sacrifice and hard work, it is disqualifying $209,000 of their income from tax deductions (should be $520,000 versus $311,000 actual) because they are married and not single.
Not only is the government discouraging people to enter these much needed professions where there are already shortages of doctors and scientists, the government is also encouraging higher earning people to not get married.
Financial Burdens On Younger Generations
Repercussions of delayed or fewer marriages include fewer children and an aging society which is creating a growing financial burden on younger generations.
Is it not discriminatory to want lower income folks to get married and have more children compared to higher income folks?
There’s already the $1,000 child tax credit that goes to families that make less than ~$110,000 a year. Why not extend the $1,000 child tax credit to all couples?
I asked a very senior US Treasury official in the Reagan administration these questions about why the government creates asymmetric rules that affect our personal lives.
He said that “it was in the government’s best interest to keep the American public fat, happy, and under control.”
The government, an entity, created by politicians, which passes laws to govern the people, doesn’t want to give the nerds, i.e., the high academic achievers and income earners who graduate from top schools, too much power or freedom. Otherwise, the politicians, would cede
Related: Scraping By On $500,000 A Year: Why It’s So Hard For High Income Earners To Escape The Rate Race
Education: Income Limits For Tax Deductions
Here’s a look at the latest income limits for tax deductions if you or one of your dependents is a student.
Child Tax Credit: Income Limits For Tax Deductions
Did you know that if you earn less than $2,500 you are ineligible for the child tax credit? I certainly hope anyone raising a child makes a lot more than $2,500. Raising children can be as expensive or cheap as you want it to be. But it does take a lot more than that to care for a child.
In 2021, you can get a tax credit of up to $2,000 per child. If you don’t owe any taxes, the child tax credit is refundable, but only up to $1,400 per child. Due to the pandemic, President Biden is trying to temporarily increase the child tax credit to $3,000 per child ages 6-17 and $3,600 for children under the age of 6.
The child tax credit upper income limits for tax deductions are $200,000 for single filers and $400,000 for married filing jointly to get the full child tax credit. This is referring to your modified adjusted gross income (MAGI).
If your MAGI exceeds these thresholds, the child tax credit amount is reduced by 5% for each $1,000 above the threshold. For example, if you are a single taxpayer and your MAGI is $225,000, you’ll receive a total tax credit of $75o.
How To Fight For Equality
The good thing about America is that it’s still a free country. Nobody is forcing you to do anything. Therefore, here are the strategies you can consider if you want to get the maximum tax deductions available to you while earning a high income:
- Don’t get married. We no longer need a license to have children. Plenty of couples are raising families without being legally married. They don’t need government shackles to dictate what they can and cannot do in their personal lives. The marriage penalty tax is very significant. Once you are no longer married, you can now earn up to $516,000 combined while still getting full tax deductions from your mortgage interest and property taxes paid compared to just $310,000. A $200,000+ income differential is significant!
- Don’t get married until the end of life. One of the most evil things the government does is take away a person’s Social Security benefits if they die unmarried. Benefits don’t go to you because you are dead, nor does it go to a surviving significant other if marriage papers aren’t signed. Can you imagine paying $400,000 in FICA tax over 40 years only to get no Social Security for you or your loved ones because you didn’t sign a marriage document or find love? Shameful! Therefore, for the sake of getting Social Security benefits that are rightfully yours, decide to get married when you know the end is near. It makes me just so mad that the government has such an unfair provision.
- Don’t get married if you have your own homes. The maximum amount of mortgage interest indebtedness you can deduct is $1,000,000 as an individual and as a couple. The $1,000,000 includes mortgage on a second home as well that you can deduct. Let’s say you have a $1,000,000 mortgage and you meet someone who also owns their home and has a $500,000 mortgage. If you guys get married, the person with a $500,000 mortgage can no longer deduct the mortgage interest from your combined income! If the person you fall in love with also has a $1,000,000 mortgage, then a whopping $1,000,000 in mortgage indebtedness is nullified. Let’s say the $1,000,000 mortgage has a 4% interest rate and the person pays a 30% effective tax rate. The person loses out on $12,000 in deductions ($40,000 X 30%) just because they get married!
- Consider getting married if you plan to sell a home with over $250,000 in profits. If one of you owns a home with over $250,000 in profits and plan to consolidate, or if you’ve been living together in a home as an unmarried couple for years and want to sell the home with over $250,000 in profits, you may want to consider getting married. Married couples can earn up to $500,000 in tax-free profits upon selling a home vs. $250,000 for an individual. It’s amazing how logical this rule is versus the others.
- Defer your compensation. Either add up all your various income in an Excel spreadsheet, or input your numbers into a tax software like Turbo Tax and figure out how much you’ve made so far. If you’re already married, then keep an eye on the $310,000 total income figure. The more you are over this amount, the more you should make a case to defer your compensation or ask for your year end bonus to be paid in the following year.
- Max out your 401k, IRA, SEP-IRA, HSA. You have until December 31 to max out your 401k: $18,000 or $24,000 if you’re 50 or older. You’ve also got until next April to max out an IRA, HSA, or SEP-IRA. Your main mission is to reduce your taxable income as much as possible. You need to be self-employed to start a SEP-IRA, for example. I’ve highlighted in a post how one can theoretically save over $100,000 pre-tax a year by contributing to a 401k and a SEP-IRA. I would contribute to a Roth IRA last because you’re paying taxes on a high income already.
- Start a business. Having a business provides you much more income flexibility. For example, let’s say you’re on track to make $500,000 one year. Given that you know $310,000 is the maximum income level per married couple, you can have your accounts receivable be paid in the new year, front load your expenses by buying that new 15″ Macbook Pro in December vs. February, or pay people extra income to get your income down to $310,000. Helping family is one of the biggest benefits of having your own business.
- Sell your investment losses. You can deduct up to $3,000 a year from your ordinary income from your investment losses. If you have more than $3,000 a year in investment losses, those losses are carried over each year until it is exhausted e.g. lost $8,000 investing in dog meat Twitter means you can deduct $3,000, $3,000, and $2,000 over the next three years.
- Give to charity. This is an easy one. Instead of giving money to an inefficient government, which wants to meddle in your personal lives, why not give to charities you care about?
Related: How To Pay Little Or No Taxes for The Rest Of Your Life
Care About Inequality
The only people who really care about discriminatory tax policies are individual or couples who make over $258,000 and $310,000 a year, respectively. But even if you don’t make such figures, you should still care because discrimination is wrong even if you aren’t being discriminated against.
There is always a chance you could make more as an enterprising individual one day. Or perhaps your own children want to bust their butts going to graduate school for years and years to become doctors. Why should they get discriminated against for investing so much time and money to help society?
My Income Tax Journey
I’ve chronicled my income journey from making $3.65/hour at McDonald’s to a lot more than $250,000 working in finance, and back down below $100,000 after my first year of early retirement.
I’ve paid well into the six-figures in taxes in my lifetime and that’s just life. The government may not be the most efficient at using tax dollars. But, I know at least some of my tax dollars have helped the less fortunate.
The ideal income for maximum happiness as an individual is $200,000 – $250,000 because you get to make the most without being subjected to tax deduction phaseouts.
Don’t Stress About Income Limits For Tax Deductions
You really don’t need much more than ~$250,000 per person to be happy. If you can find the love of your life who also makes around $250,000 a year, then all the better. Marriage is not necessary to be happy!
If you currently make more than $250,000 a year while not loving what you do, know that it’s OK to make less. $250,000 puts you well within the top 5% of all income earners.
Ultimately, don’t stress too much about income limits for tax deductions. Income tax limits for deductions and credits are constantly changing. Your happiness more important than stressing out if you’re not fully optimizing your tax situation every single year.
Take a chance at going after your dreams. You will feel incredibly happy no longer paying an exorbitant amount in taxes each year while no longer being assailed for being rich. The middle class is the real first class!
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In your article you mentioned the $1m threshold for mortgage interest deductions. I’m not sure if that threshold only applies to your primary residence and second home or if it applies to rental properties as well. If it does apply to rental properties, as a real estate investor how would you suggest ensuring that you maintain the ability to deduct mortgage interest on those properties. Placing the investment properties in a trust, LLC, S or C Corp?
FS I thought you might want to write an article to vote against Bernie Sanders:
Financial Samurai says
That’s quite an increase across all income classes! Good thing Bernie won’t win the nomination or become President.
It’s probably going to be robot Hilary, which means she will keep the party line by not raising income on those making over $250,000 a year individually. I’ve structured my finances to stay around that area, and not much more in order to not be adversely impacted. It is one of the greatest feelings getting the blessing of the government to not have to make more. If taxes were lower, I would be financially incentivized to work harder and make more until it wouldn’t make any sense anymore.
Just wanted to leave a comment on #6- maxing out your 401K or IRA- I agree that you might as well max out your 401k, since those dollars are pretax, but beware if you’re thinking of maxing out a traditional IRA as well. There’s a provision in the tax code that if you make over a certain amount (I believe it’s 96K for married couples) AND you contribute to a 401k, you CANNOT take the tax deduction for a traditional IRA. We use Turbo tax, and it improperly allowed us to take this deduction last year. Well, the IRS sent us a nice letter explaining that we made too much to be entitled to this deduction and owed them over $3K with penalties. We are no longer contributing ANYTHING to our traditional IRAs (we make too much for a Roth), because we get absolutely no tax deduction now AND we’ll be taxed again at withdrawal. SIGH.
But you could do (or could have done) a Backdoor Roth conversion since you were going to be taxed on it anyway. You might have to recognize some of the income on the conversion if you have other pre-tax dollars in your traditional IRA, but at least you could shield all of the future growth on those dollars from taxation.
Brian Chong says
Here’s the convoluted Traditional IRA deduction rule:
Married, both persons have 401k plans = income limit is $98K to still get full tax deduction
Married, only one person has a 401k plan = income limit is $183K to still get full tax deduction
Married, neither person has 401k plan = no income limit to still get full tax deduction
Can you get a refund from TurboTax for the penalty you incurred? As good as TurboTax is, it’s not going to explain the tax rules to you or give you advice on how to pay less taxes. A good CPA could look at your W-2 and tell you whether or not the IRA contribution is tax deductible.
Great points Sam. I like how you think about strategies that are lesser known to the public.
I wanted to add a tax tip for your readers who invest in real estate. According to the tax code, there are 4 levels of real estate investors. (I should publish a short book on taxes for real estate investors and sell it on Amazon.)
Problem: You’re married and your income is too high to take the loss on your rental properties. (You can be cash flow positive but still show a tax loss due to a “phantom” expense called depreciation.)
Solution: One of the spouses qualifies for real estate professional status. Then, you can claim 100% of rental loss and you are not capped by passive activity loss or income limits.
One of the spouses would have to quit their job or work less than part-time AND spend more time doing real estate activities (managing property, finding tenants, repairs, research, etc.).
So instead of being restricted to ZERO loss on Schedule E, you can now take 100% of your loss regardless of income. (a $100K loss would save you about $25-35K in taxes)
How to qualify for real estate professional status in the eyes of the IRS:
1. You don’t need a real estate license. (common misconception)
2. To get “real estate professional” status, the rule is that you spend at least 750 hours for EACH* property you own doing real estate related activities AND spend more time doing real estate than your day job. So if you’re working full-time (2000+ hours/year), you’d have to spend another (2,000+) hours doing real estate, which makes it almost impossible for someone with a full-time job to qualify to be a “real estate professional”.
3. However, if you work part-time or quit your job, then you could qualify.
4. * There is an exception to this rule. You can make an election by
attaching a statement citing the IRS code to your tax return, which
allows you to group all your rental properties into ONE property, so
that instead of spending 750 per property, you just need to spend 750
hours total between all properties.
Brian Chong, CPA
Huge fan of your blog, and I completely understand that using plain or blunt or controversial language can be a tool for getting a point across. But just wanted to let you know you completely lost me with when I read this:
“I asked a very senior US Treasury official in the Reagan administration these questions about why the government creates asymmetric rules that affect our personal lives, and he said that ‘it was in the government’s best interest to keep the American public fat, happy, and under control.'”
I’m sure that’s one guy’s view, and may even be true for him, but it definitely feels like we’re making a bit of a leap when we say the government is using marginally different tax brackets to…basically…try and produce a generation of people not driven to learn and succeed. And it sounded like you were agreeing with that guy.
I won’t go into them, but there are all sorts of assumptions implicit in your quote and commentary about why married couples have children, the factor that income plays in it, the factor a few extra thousand $ in taxes would play in the subset of planned pregnancies by married people, and then getting into the absurd–that families of lower incomes will be less-likely to produce children who are nerds or people that would be educated and engaged citizens. Parental income may help predict financial success of their children on average, but there are certainly no figures on being an engaged citizen with an ability to exercise sound judgment.
Again, I know the blog is both information and meant to be entertainment, but it just seemed a bit absurd to read those 2 paragraphs.
Financial Samurai says
Just take a look at the two charts highlighting the aging demographics in this post from 1950 to 2015. People ARE getting married later, starting families later, not getting married due to the tax penalty, and creating a very challenging demographic inverse triangle that creates a massive burden on younger generations. Think about Social Security repercussions, more of adult’s children’s incomes going to support their parents b/c they can’t split the expense 3 ways with two other brothers and sisters etc.
If you want to look at an extreme case, check out the demographic trend of China due to its one child policy.
I disagree with you that the government should use tax policies and laws to decide who can do what with their personal lives. Never stop fighting for your freedom. Once you’ve lost it, or experience discrimination, or achieve financial freedom, I am absolutely sure you will see my viewpoint more clearly.
Another marriage tax I often fail to see mentioned is the phase out on Roth IRA contributions and conversions. As a single filer the contribution phaseout is $116-131K while $183-193K as a married couple. Even worse is the conversion phaseout of $100K as a single filer and as a married couple. As a higher income earner I am phased out, but if I marry my girlfriend legally that makes $70K she will not be able to contribute or convert anymore. Difficult to assign an actual dollar amount on this type of penalty.
Financial Samurai says
Bingo. Good thing, if one is making more than that, I definitely do not recommend contribution to a Roth IRA.
Disadvantages of a Roth IRA: Not All Is What It Seems
The Only Reasons To Ever Contribute To A Roth IRA
Nick, there is no income cap anymore to convert from a traditional IRA to a Roth. It used to be a $100,000 cap, but now anyone can convert. I did it last year despite having a roughly $250,000 AGI (higher than normal because I sold my condo).
I disagree with Sam and think Roths are great. I even wrote a post about it on my own blog, which I won’t link to here out of respect for Sam and his blog, but the gist of it is that if you don’t expect your tax bracket to drop in retirement and/or you’ve got 5 or more years of contributions before retirement, it would probably benefit you to do a backdoor Roth conversion.
Financial Samurai says
I’m always impressed with people who believe they’ll make more in retirement than while actually working. Makes America a land of immense opportunity!
America IS a land of immense opportunity! :) But it’s not even a matter of making MORE in retirement. My goal is to make about the same as I do now. Maybe a little less, but not much. I’m living cheaply now, and I’d like to live it up more in retirement. More travel, better house, less penny pinching.
Looking at the math alone, if you earn about the amount in retirement, you’re better off doing a Roth. If your tax bracket is expected to drop fairly significantly in retirement, but if you have a good chunk of time before you get there (10 or 15 years or more), you’re still likely better off doing a Roth because you can shield all of the earnings on that account from tax. Plus, the 28% and 33% tax brackets are really wide, so if you’re at the mid-to-high end of the 33% tax bracket now, you’re pretty unlikely to drop below the 28% bracket later, even with a significant income cut. You could drop from $411,000 to $91,000 in retirement and still just drop from the 33% bracket to the 28%. If you’re currently making $180,000 and you expect to make $120,000 in retirement, you won’t change tax brackets at all.
Bottom line, if you’re planning to make 6 figures in retirement, it seems like there would be very few circumstances where you would be worse off in a Roth, particularly if retirement is 10+ years away.
Financial Samurai says
Gotcha. What percentage of the population do you think plans to make 6 figures in retirement?
Let’s say six figures = $100,000. At a 2.5% risk free rate of return, you need $4,000,000 in assets producing income. What percentage of the population do you think has $4M+ in income producing assets?
Probably not a huge percentage of the population as a whole, but probably a decent percentage of FS readers, I would imagine. New poll, perhaps? :)
You’re assuming everyone is going to do the risk-free CD thing. I’m going to get to my $100k+ in retirement with a blend of assets, including mostly rental property, which can throw off a lot more income than a CD can. Just $2 million in rental real estate at a 5% cap rate gets you $100,000.
Financial Samurai says
Sounds good. I wish you good luck!
Here are some “shit happens” case studies which explain why 401k balances are so much lower than expected: https://www.financialsamurai.com/median401k-retirement-balance-by-age-is-dangerously-low/
Hi Sam, long term fan of your blog here and it’s my first time writing comments. I thought it might be interesting to share my discovery about tax equality. This is what I found from my wife’s law school note, talking about why we can’t eliminate marriage penalty/bonus in a progressive tax system.
Ex. 1: Single person who earns $20K
2: Two single people each earn $10K
3: Husband earns $20K, wife earns 10k
4: husband and wife each earn $10K
What we would want for equality
– If we want no penalty on being single then 1=3
– If we want no penalty on being marrying then 2=4
– If we want married couple with the same income to pay the same tax then 3=4
– If above is true then everything must equal each other **
Why we can’t treat all 4 cases the same
– Progressive tax rate – can’t treat a person who makes $20k the same as 2 people who each makes $10k and are not married the same because of different tax brackets.
-> Can’t treat 1 and 2 the same
-> Penalty for 3 if in comparison to 2 because if you file jointly you are stacking spouses incomes on top of each other
– Congress has decided to treat married couples the same
-> Treat 3 and 4 the same, and this creates a marriage bonus for 3
In short, marriage is a bonus for (one high income + one low income) couples, and it’s penalty for (two moderate-income) couples. This is because congress thought it’s better option to treat married couple the same with the logic above.
Financial Samurai says
Thanks for sharing!
See: Analyzing Various Income Levels Until The Marriage Penalty Kicks In, that comes to a similar conclusion.
We really should have tax reform but I don’t think the marriage tax will be abolished in our lifetimes. It’s annoying they think the current system is fair.
I’m doing okay with my taxes this year. I need to recalculate my last estimated taxes figures this week. Gonna add that to my to do list now.
Fun post! Although, I disagree that your rule #4 is logical. It’s just as discriminatory as the rest. If my buddy and I each buy houses next door to each other which significantly appreciate, he can sell his and keep more of the profit just because he signed marriage papers?
Financial Samurai says
Yes. He is more worthy than you according to the government. :)
@Sam, two things to add:
1) The income limit you specified above is AGI. (it does make a difference)
2) I think marriage *can* actually be beneficial when one spouse is a full-timer and another is a freelancer.
Perhaps you could write a more detailed post on (2)? :D
Financial Samurai says
This post should help answer your questions from a financial perspective: https://www.financialsamurai.com/at-what-income-level-does-the-marriage-penalty-tax-kick-in/
The numbers trump all bc you don’t need to be married to have one person work FT, another work PT.
that’s why I married my husband after dating for 8 years. As a freelancer, I enjoy his benefits immensely. I just have to pick up his socks on the floor and put the toilet seat down every now and then.
Wow, how do you keep coming up with great content and inspiring your readers to think in unconventional ways? Keep it up.
Though I wasn’t sure what you meant by this phrase under starting a business…”Helping family is one of the biggest benefits of having your own business.”
Financial Samurai says
I’ll write a post about it and explain. It’s wonderful to be CEO and help the people you care about most.
I really hate most of the whining. Boo hoo I lose out on deductions because I make too much money. Has losing tax deductions ever stopped people from wanting to make more or not to become doctors or lawyers?
I don’t get some of the deductions because of our income but it is what it is. On the other hand all deductions for married couples should be exactly double what a single person would get. That’s not fair.
Financial Samurai says
There is no whining, only solutions. I’ve provided 9 in this post. Any from you?
And yes, I know plenty of people who decided not to be doctors, or forgo specialities with further study to be GPs bc they did the math and found it wasn’t worth it.
I know even more people who forgo marriage and a family due to the government’s rules. There are plenty more who go John Galt.
The upside is much more leisure time, less stress, and ultimately more happiness for those high earning W2 income people.
What is your age, income, and marital status?
Yes, losing tax deductions does stop people from wanting to make more. It is quite simple, the more you tax something the less you get. People are rational, they will work less hard if they are only able to keep 50% of their reward than they would if they could keep 90%. You may call it whining but it is fairly sound economic theory. In a perfect world our tax code would be designed to generate enough revenue to support governmental functions. Unfortunately, it is used for other purposes.
This is a great post, now I regret doing the marriage license 13 years ago. We could have saved some money. Sam, do you mind sharing your situation. Are you married and how many years of additional taxes did you have to pay for the privilege of being married.
Financial Samurai says
Do you really regret getting married 13 years ago though? Are you still married?
I’m happily married in the eyes of our own private love. I tend to practice what I write. Otherwise, what’s the point?
I think I’ve saved at least $150,000 so far, which I’ve partly used to help other people through donations and time. And I hope writing this post will help people think differently and help people optimize their finances.
Having “equality” in taxes is just plain stupid. 15% of your paycheck for someone who makes $25’000 a year is a much bigger deal than for someone who makes $250’000 a year. Likewise, a $1’000 child credit is just “spare change” when you make $250’000 a year, while it can mean being able to eat at the end of the month for a low income family. There are thresholds and they can’t be ignored.
As you mentioned, there is a “level” of income at which you don’t get more happiness. That level is not $250’000, it’s $75’000 in the US on average. The number varies by state, but only DC and Hawaii have values over $100’000. 250’000 might be your own number, but it is not backed up by any serious study.
So a family making more than $311’000 a year is very, very well off. It sucks that they have to pay more taxes and lose some benefits, but it would suck more if the 99% who make less than them decided one day that they will take that money by force. When you create such inequality that people start getting really pissed off (which is what would happen with your “equal” suggestions), the rich end up paying a worse price than taxes. Look for “French revolution” in your history books and see what happens to the rich who always want more.
I’m not arguing taxes are perfect in this country, but if you think “equality” means everyone pays the same rate and gets the same benefits, you are ignoring lots of factors IMO.
For what it’s worth, my household will declare more than $250’000 in income this year. and I’m married.
Financial Samurai says
I understand it is much easier to not fight for equality when you aren’t the one who has to pay. I just hope people can realize that discrimination is wrong even if people aren’t being discriminated against. Look at all the negatives that result from government meddling of personal lives.
It doesn’t matter if you file over $250,000 married if the figure is under $311,000. You aren’t being targeted. Making $311,000 as a married couple or a little bit less is ideal.
Here is a great poem by Pastor Martin:
First they came for the Socialists, and I did not speak out—
Because I was not a Socialist.
Then they came for the Trade Unionists, and I did not speak out—
Because I was not a Trade Unionist.
Then they came for the Jews, and I did not speak out—
Because I was not a Jew.
Then they came for me—and there was no one left to speak for me.
FS I’m usually tracking right with you but not on this one. I have been well above the $311k mark for a number of years and yet I agree with Stockbeard entirely! The various deductions meant to help the lower middle and middle class make it possible for them to really have a middle class lifestyle, send kids to college, own a home, etc. I don’t mind at all when I see those tax benefits fall away as I just don’t need them. I also don’t see the need for a tax deduction on a mortgage for someone who makes more every year than most people’s houses are worth!
Second, your quote above is a poem on the wall of my house. It’s a reference to the Nazis taking people away to the concentration camps and has nothing to do with something so banal as tax rates. Seems inappropriate of you to use the quote in this context.
Financial Samurai says
Kevin, this post isn’t about taxes as much as it is about equality and freedom.
I don’t mind a progressive tax system up to a certain point. Everybody agrees that after a certain taxation level, people will do the rational thing and stop working e.g. if the government taxed you 90%, would you still bother to make more? Of course not.
This post is about pointing out the government doesn’t believe one spouse should make their own fortune, be independent, and go after their own higher paying careers. If they did, they would make 1 X 2 = 2, not 1 X 2 = 1.25.
As for the quote, first you ignore the little things, and pretty soon, the big things sneak up on you where you can no longer ignore. Fight for equality and freedom Kevin, across everything, not just things you care about.
“It sucks that they have to pay more taxes and lose some benefits, but it would suck more if the 99% who make less than them decided one day that they will take that money by force.”
Isn’t that where we are? A majority has decided that they can take more money from the “rich” by force – government taking through taxes is basically by force – the ultimate force.
I’m not sure why having equality in taxes is stupid. Seems rational to me. Is there an economic argument in disproportionate rates or is it merely a psychological argument. I believe it is more the latter which is what you kind of indicate too. If a flat rate raises all boats – which it may not, though there is some indication that it would – then aren’t the less well off benefited too?
I don’t really understand why the government needs to be involved in our relationship. I also hate how much extra taxes we would pay married. This year it was only about $4-5k but next year it’ll go up to $9k and it’ll only go up from here. The loss of deductions, the extra investment taxes, plus being bumped up to a higher tax bracket from where we are individually. If my condo becomes worth more than $250k than what I paid for it, then getting married might make tax sense. I don’t want children though so I see no general point in getting married. I must be one of the few women commenting on your posts like this saying that!
“I must be one of the few women commenting on your posts like this saying that!”
Oooh, Leigh, don’t fall into that trap, please. There are plenty of us women out here who are not trying to drag our boyfriends to the altar for various reasons, finances being among them. I get that you’re not part of the stereotype, which is great, but please be careful not to reinforce the stereotype in the process of pointing out your difference from it.
practical patty says
I’m another intelligent lady with an equally intelligent partner who also sees the benefit of child-freedom and not needing the paper that says we’re married. we did the math the first year we dated on a trip to Patagonia and figured out that we could take kick-ass vacations like that every year with our tax savings from not being married.
there are plenty of us out here that think the same way
Financial Samurai says
Just think about all you could do with the extra $9,000 a year that doesn’t go to a wasteful government!
I am absolutely SURE that more people would vote NO to marriage if they actually had to pay $10,000 – $20,000 more a year in taxes. You can feed a lot of people with that type of money, instead of having it go into a gov’t black hole.
Wow did not realize the marriage penalty was so steep. It seems the most important thing in all of this is to KNOW the phaseout limits so you can make some changes. Isn’t it funny how government officials will give you the cold hard truth only AFTER they’re out of office. I think ignorance is one of the most powerful tools a government can use to keep citizens in line.
Our progressive income tax is built around the notion that those who prosper more should pay a higher percentage in taxes in the name of fairness – despite the fact that they are already paying more in absolute dollars no matter what the percentage is and despite the fact that they typically use less governmental resources (i.e., typically not on welfare).
Further, there is no real good economic argument to support a progressive rate structure (that I have seen). Fairness (or appeared fairness) trumps all. Unfortunately it is the system we have.
I have no doubt that many dual income high earners avoid marriage precisely to avoid the marriage penalty.
As for me, marriage is a sacrament and fundamental for raising children. Thus, my decision to marry had nothing to do with tax or other governmental considerations.
Hopefully one day, we will have a simpler tax code, but I’m not sure that day will come anytime soon.
Financial Samurai says
Would you still get married if you had to pay $20,000 a year extra to the government though?
I do hope the tax code gets simpler than the 70,000 pages one day. This post is more about discussing why the government should meddle in our private lives vs. taxes actually. Because at the end of the day, 95% of married couples earn less than $310,000 a year, so who cares.
Wall Street Playboys says
Yes! Will say it a million times. Get the wedding, get the ring, have the kid… Don’t let the government into your life! They will do anything to make you pay more for no reason. Avoid, avoid, avoid.
Bonus: if she needs the government contract to prove you’re in love. You’ve been given the green light to leave her and never look back. She didn’t love you at all.
I think you’re oversimplifying it a bit. There are a lot of good reasons to be married that aren’t about “proving you’re in love.” There are also a lot of good reasons not to be married. Your “bonus” statement comes across as sexist and a bit absurd. Maybe that was intentional, though.
Wall Street Playboys says
Replace “she doesn’t love you” with “he doesn’t love you” and it has the same meaning.
IE: **anyone** who *needs* a contract from to prove they are in love/married is certainly not being logical if there is a material tax levy as well (there is).
There are religious reasons to get married. Also a high income earner might be better off officially married than in a common law marriage. And it’s not terribly wise to have children outside of marriage. I think the solution is to marry your equal – and/or avoid really long-term relationships (7+ years) or having children with someone you don’t want to be obligated to support.
Thank you for clarifying. I’m relieved there was no sexist intent behind it. (So many internet trolls these days…) I agree that if someone wants to get married just to prove that they’re in love, you’re better off without them. But like I said before, there are also loads of material reasons to get married or not, e.g., inheritance, retirement benefits, kid-rearing issues, medical emergencies, etc. There could be a non-love-proving reason behind a partner’s desire to get married that aren’t trivial.
All of the things you described can be done without being married, and the kid rearing thing isn’t about “marriage”, it’s about having a stable, loving household growing up. You don’t need a piece of paper from the government to provide that.
There are a number of provisions that exist in the law that work to the benefit of married couples related to the items that I listed. If you want a more detailed discussion of them, you can read some of the court opinions related to the gay marriage issue, where those plaintiffs argued that being unable to be married under the law denied them certain protections that they would otherwise have.
For inheritance: you can leave an unlimited sum of money to your spouse without taxation. You can’t do that with anyone other than your spouse. For retirement benefits: if your spouse is the beneficiary of your IRA, your spouse can roll over your IRA into his or her own IRA, and take the distributions when they retire, instead of being forced to take distributions immediately or to liquidate the entire account over the next 5 years as an inherited IRA. Also, as a surviving spouse, you are usually entitled to your spouse’s social security or pension benefits. If you don’t have your estate plan in place, like many, many other people out there, you can usually make medical decisions for your spouse if he/she is incapacitated and you can have access to them in medical facilities that allow “family only” access, whereas if you’re unmarried and you don’t have a durable power of attorney for health care, you can’t. There’s kind of a long list of little things like that. You can try to plan for most of it, but you have to be really diligent, and there are some things (like the inheritance/pension issues) that you can’t “fix” with planning.
I’m not a total advocate for marriage, here. I’m unmarried (after having been divorced once) by choice. I’m just saying there are legit reasons why someone might want to get married, apart from needing to “prove their love” or whatever other bogus reasons might be floated out there.
Financial Samurai says
Well what do you know! Here’s a post I wrote called, Financial Benefits And Tax Penalties For Gay Marriage, since you brought it up.
Dang, I’m thorough!
Nice work, Sam! :D
Financial Samurai says
I agree with this. Why do we need the government’s approval to show our love for one another?
We show love and compassion to non-spouses all the time. We don’t need to register to the gov’t and then pay them extra in taxes for the sake of doing so.
Women need the government in their marriage to protect them when their Wallstreet Playboy husbands inevitably run off with a younger model, leaving them broke, supporting Playboy’s children by themselves.
The marriage certificate is not to prove love, it is strictly business. Like an employment contract or a business partnership. It is never prudent to combine financial assets without a contract. Same with a marriage. A marriage is, in essence, establishing a financial partnership. You can have love and kisses and kids anytime you want. Once dollar bills enter the picture, and you start merging taxes, debts, assets, inheritances, you would be a fool to not have a contract.
Best to not let your wife read this one! The inequality point is made and made pretty well, but there is no recourse for us really. Government sucks – we all know it and we all hate it and we all have to suck it up, except those sucking on the teat. Honestly though, who is going to delay or forego marriage to set aside tax liability. Silly talk, and you keep pounding away at it.
Financial Samurai says
Lots of people who realize the law, the unfairness, and the math. Just look at the poll.
I will pound away at it until at least Social Security benefits are allowed to get donated to someone or an organization in case of an early death before we get back what we paid into it.
Is this what you’re getting at by age 80 above? I have determined that if I had started claiming last year (at 66), I would have made back all my lifetime SS payments by age 74. If I wait until 70, I will make back my payments by 76. But don’t forget the other part of FICA, your Medicare taxes. Obviously Medicare is not free; you have to pay premiums, deductibles, co-pays, and the like, and you want to avoid the dreaded part D “donut hole” for your prescriptions. But the Medicare portion of your FICA is a far lower percentage than the SS part, while if you have a catastrophic illness or major operation covered under Medicare, the government will easily pay out far more than your lifetime Medicare tax payments.
Financial Samurai says
I’d love to see the math behind getting all your SS money you put in, in just 8-9 years of collecting. If this is the case, excellent!
Make sure you live well beyond 74!
“I’d love to see the math behind getting all your SS money you put in, in just 8-9 years of collecting.”
Simple. I go to SSA.gov and look up my total SS taxes paid, my estimated monthly amount if I start collecting at 66, and my estimated monthly amount if I start collecting at 70. I multiply each monthly amount by 12 to get the annual amounts. Then I divide total taxes paid by each of the two annual amounts. If I started collecting at 66, I’d need 7.8 years to get back all I’ve paid, or age 74. If I start collecting at 70, I’d need 6.1 years, or age 76. How’s that?
I’m one of those people. My “wife” and I had a ceremony and reception (which happened to look EXACTLY like a wedding) and she changed her last name. We wear rings, live together, etc etc. Difference is we don’t have to worry about all the nonsense Sam describes. We of course made each other the beneficiary on our accounts and are insured together. We are high income earners in our 20s, so we don’t expect that SS is even going to exist for us. What’s the point of having a government seal of approval on our decision? Don’t want it or need it, especially if it cost us more. There’s already a “significant other” distinction to sign each other up for work and other benefits already.
Financial Samurai says
Well done! And if you want to get married in the eyes of the law one day, you have that optionality as well.
A lot of folks also forget divorce is about as common as marriage. Separating is also much easier without being officially married.
You know what’s weird? In my experience, it feels unfair on both sides of the fence. When I was married, I made about as much as my spouse, and the marriage penalty felt really unfair, because if we were single our combined tax bill would have been lower. Now I’m single again, and my long term boyfriend and I live together in my house, while his is rented out for additional income for him. I’m a lawyer, and he’s a mostly-out-of-work musician, so I make maybe 5-6 times what he does. It feels unfair to be taxed as a single on my high income, rather than being able to shift some of my high income into his tax bracket, because I’m effectively supporting our household with my excess income. In our case, we would actually save money by being married.
I think no matter what the tax policy is, if you would save money as the other guy in the scenario, it feels unfair.
Financial Samurai says
Yes, if one person makes a lot and another person makes much less or close to nothing (as the government wants one spouse to stay at home), your tax burden will improve. But why is the government in our business of persuading who to do what?
If you get married, your taxes will go down, but now your bf will have rights to your income/assets that accumulate the day the marriage commences. Not bad, but again, why are there so many restrictions?
I agree, the government shouldn’t be in the business of persuading people to do things, because they’re not very good at it. Some say that the reasoning behind the marriage penalty is that a cohabitating couple is more financially efficient (and therefore needs less money) than two singles who live alone. But the gov’t isn’t taxing cohabitating unmarried couples that way, and it’s not allowing cohabitating singles to shift and share income tax brackets, either. It’s a deeply flawed system.
You’re absolutely right about the other part of marriage: the dreaded (in my case) community property problem. That’s one of the reasons we’re not married. We’re both adults who supported ourselves before we got together (he’s 45 and I’m 36), and there’s no reason (kids, etc.) why I need him to stay at home or work less, so there should be no asset shifting going on during the relationship. If he’s fine making what he’s making, then great. I’m fine making what I’m making. But I work a lot harder than he does to earn my higher income. It’s not fair to me to have some of my income/assets ripped away if we split up, just because he chose not to work as hard or work in a high-paying career field. Family support laws clearly need tweaking, too, depending on the situation. That’s a whole ‘nother conversation, though. :)
On a bright side, f you sell your home as a married couple you get to keep first 500k in profits untaxed vs 250k for a single individual. In theory a married couple could keep taking 500k in profits over and over again every few years if they are savy enough in picking the right homes throughout their life as a married couple. This would more than compensate for any marriage penalty but otherwise you are right.
Financial Samurai says
That is the bright side! Thanks for reminding me. I will include.
But people should consider going on strike and never selling their home until the ridiculous 5% selling commission comes way down to 2% or a fixed rate. Everything has become easy and standardized and disrupted thanks to the internet, except for real estate commission structure.
Can you imagine if you had to pay 5% or more for a mutual fund?!
Redfin.com is a buyer’s agent that gives you half of their commission back if you buy or sell through them. So of Redfin’s total commission (3%), you get to keep 1.5%, making the total commission charged only 4.5%. It is only available in certain markets in the US but it is a step in the right direction! The larger the selling price, the more impactful this can be.
Financial Samurai says
saving 0.5% from 5% is good, but it depends on the quality of the agent and their Rolodex.
I realize the comission is usually between 5-6 percent, but after it is split between the two agents involved in the transactions and the brokerage takes around a 1percent cut it sounds very resonable to me.
You must live in a market with modest home values. In SF where FS lives, a million dollar home is no big deal and paying $50K in realtor fees is never “reasonable”.
Why is it not reasonable? If a realtor is able to get you $50,000 more in value than you would otherwise, isn’t that reasonable?
S – that is a big IF given the internet today with zillow, trulia, etc with people that can do their own homework. On the lower end of homes (< $250k/value, I think Realtors nearly always make sense but not necessarily above 500k (at least not for sellers, maybe for buyers, although savvy buyers could go without and use the less fee to negotiate a lower purchase price)
If you assume a realtor spends 25-50 hours per property selling on average, that basically implies $1,000 to $2,000 per hour at a $50k payout. Senior corporate retainer lawyers in NYC command that kind of money. No reason a typical Realtor should be getting that kind of dough IMO.
What? Does that even make sense when you read it back? The difficulty does not materially change with price, just like an AUM fee, it isn’t inherently any more difficult as it scales.
Especially nowadays where buyers basically decide beforehand what they’re going to buy and the realtor basically forwards docusign to you. What real service are they providing that wouldn’t be better reflected by a set fee?
There are very few industries where this can happen outside of a captive audience situation.
In Santa Clara County (SF Bay area), about 50% of the realtors sell 0-1 house per YEAR. If a realtor sells 1 house a month, they’re doing very well compared to their peers.
I’m not a realtor but I’m on the Board for a real estate association so I attend a lot of real estate seminars and network events. I’m a CPA and have realtors as clients and believe me… they don’t make a lot of $ b/c there are a lot of marketing expenses and commission splits.
“One of the most evil things the government does is take away a person’s Social Security benefits if they die unmarried.”
I don’t know where you are getting this from. I was never married. I am entitled to SS benefits. I’ve never seen or read anything to remotely suggest otherwise.
I think he was saying that if you are married, and you die, your spouse is entitled to the higher of your own benefit, or your spouse’s benefit. If you are single and you die, even if you have a long term relationship with someone, your benefit just evaporates. No one else is entitled to receive the benefits of your social security.
Financial Samurai says
If you die Larry, you wont get any SS benefits unfortunately, because you are dead. And because you aren’t married, neither will your surviving significant other if there is one.
Your #1 mission is to live past 80 years old if you remain single.
Well yes, Sam, if I die before I start claiming benefits, I won’t receive any benefits. And I take your point about my significant other, except that person will receive their own benefits which may come close to or equal mine. I’m not sure where you’re coming up with age 80, unless you’re thinking in terms of breakeven analysis. But an article like this sums up the problems with that way of thinking, IMO:
I intend to start claiming at age 70, because for each year I wait I get 8% additional. Decisions about claiming also have to take into account your ability to fund your retirement from your own savings/investments, as well as your tax situation. But explain what you mean by age 80; I’m listening.
He means that your significant other should get twice as much money when you die; their own SS benefit AND yours. That’s how it would work if you died and had money invested in your own investment accounts (assuming you set it up that way).
You don’t have that option with SS; all the money you paid in taxes over the years in your “government investment account” would simply disappear and not go to your significant other, unless you are married.
You get 8% a year more but you must wait 8 years of foregone income. If you assume 6-7% market returns with your SS money, you must live to be at least 86-87 to breakeven from waiting to 70 vs 62. That, coupled with the fact that you will enjoy the money more in your 60s, means I will take SS as soon as I can. Now if you aren’t retired at that point, waiting makes sense.
as someone who works in non-profit fundraising, we get lots of donations from wealthy people, especially this time of year! One thing that fascinates me are charitable giving funds, like through Fidelity, Vanguard, Charles Schwab, etc. They’re great for people who want to get the tax-deductions annually, but prefer to be able to do big $$ donations at some point in their life. You can give to them annually and get your tax deduction in each year you contribute to them. The money grows interest in these accounts at no cost to you (I believe–if there’s a charge, it’s minimal since these companies having the accounts get tax-deductions themselves for having the products) Some companies like Goldman Sachs even have their own for employees (and I think if you’re at a certain job level there, they “force” you to contribute to them). Then, when you’ve got a large chunk of change in the gift fund, you can give it away (or you can give it away when it’s low too). You don’t get a second tax-deduction when you give away the money, but if you’re the type that would rather give a lot when you can give a lot, it’s a great way to get your annual tax write-offs each year with your donations but then be able to give a lump sum of money to get your name on a building (or whatever you want) when the time comes.
Or you do the opposite. We have a charitable trust through Fidelity. We put donations in there during the last (very high earning) working years to get the deductions and now have what I call our charitable IRA…it was funded when our tax rates were high and we do the giving each year going forward now that our tax rate is low (because our earnings are lower in early retirement).
These funds are incredibly easy to set up, have no fees, allow you a variety of mutual funds to invest in (mutual fund Mgmt fees are how the brokerages get paid) and make tax reporting easy: you make one bigger donation to the fund which you report on your taxes, and don’t have to report all the smaller donation details for the distributions you made from the fund to your charities.
mary w says
Plus you can donate appreciated stock/mutual funds/ETFs without paying capital gains tax on the gain. If you’re a long term investor that can be major.
An additional bonus is that when you give the money to charity you can choose to do it anonymously or just with the name of the trust if you wish. It saves me getting on mailing lists.