Here are Justice Anthony Kennedy’s words after the Supreme Court voted on June 26, 2015 that same sex couples have a constitutional right to wed. Justice Kennedy was the swing vote.
No union is more profound than marriage, for it embodies the highest ideals of love, fidelity, devotion, sacrifice, and family. In forming a marital union, two people become something greater than once they were. As some of the petitioners in these cases demonstrate, marriage embodies a love that may endure even past death. It would misunderstand these men and women to say they disrespect the idea of marriage. Their plea is that they do respect it, respect it so deeply that they seek to find its fulfillment for themselves. Their hope is not to be condemned to live in loneliness, excluded from one of civilization’s oldest institutions. They ask for equal dignity in the eyes of the law. The Constitution grants them that right.
20 years from now, we’ll look back upon June 26, 2015 in wonderment. We’ll wonder how the verdict to allow equal rights for same-sex couples to marry came down to such a contentious 5-4 vote. It’s not like giving gays the right to marry hurts the freedom of others. I’ve read the arguments for both sides, and the unsurmountable truth is that discrimination is wrong. Rulings that side for equality are an inevitability.
We don’t choose to be born gay, straight, Asian, Black, White, Hispanic, Transgender, rich, or poor. We only choose the actions we take in life. Now that an estimated 2% – 10% of the US population can legally marry, let’s talk about what marriage means from a financial perspective for actually everyone!
FINANCIAL BENEFITS OF MARRIAGE
Potentially Lower Income Taxes. Married same-sex couples can now file joint state income tax returns, which typically leads to a lower tax liability than filing two individual returns. However, as I will clearly demonstrate in 10 different income variation examples in this post, there are also marriage tax penalties to contend with, especially those couples who make higher salaries, or when one spouse makes a much higher salary than the other.
Gift Tax: The current gift exclusion amount is $14,000 in 2015. Give any more than that to a girlfriend or boyfriend and you’ve got to pay taxes! As a married couple, you’re allowed to give whatever you want, however many times you want to your spouse without incurring a gift tax penalty.
Estate Tax: If you die, the federal estate tax exemption rises to $5.43 million per person, and $10.86 million per married couple. If a couple so happens to have a $8.43 million estate to pass on when both die, unfortunately, $3 million of the estate will be taxed at around 50% if the couple is not married.
Health Benefits: In states that denied same-sex marriage, fully-insured medical plans could deny coverage to same-sex spouses. Not anymore! I’m paying $1,500 a month for health benefits for two healthy people. That’s a ton of money an unemployed or underemployed partner would have to pay if they weren’t allowed to join their partner’s health plan.
Financial Security: One of the most important financial reasons to marry is Social Security. Let’s say you pay 30 years of FICA tax and then die at age 62 or before. If you have no spouse, the government gets to KEEP all the money they were supposed to pay! What kind of bullshit is this? The government doesn’t make it easy to designate a beneficiary other than a spouse. I’ve argued that Social Security can theoretically make us all millionaires in retirement.
In addition to Social Security, there will be similar rights to inherit rollover IRAs, 401ks and other retirement plans as well. Finally, in the event of a divorce, assets and earnings accumulated during the marriage get to be divided equally.
MARRIAGE PENALTY TAX EXAMPLES
Here are various fictitious couples with various income levels and deductions to give you an idea of how much extra you must pay the government in order to get married. Some of the arguments against gay marriage are due to the fact that the government will be able to collect more taxes as a result.
All data comes from this marriage penalty tax calculator by the Tax Policy Center. I also encourage you to input your own numbers and see what happens after this post as well.
Marriage Penalty Tax Example #1A
Each person makes $50,000, no children, no mortgage, no penalty. Hooray!
Marriage Penalty Tax Example #1B
Same example of $50,000 income each, mortgage, but with two children. It shows a marriage penalty, but the overall tax amount is lower due to child tax credits. From $11,638 to $7,863. So far so good. There is hope for humanity, but the government is saying you should have children as singles instead.
Marriage Penalty Tax Example #2
One person makes $100,000 and has a mortgage, another person earns $50,000. They have no children but it doesn’t matter even if they did because they are past the $110,000 combined income threshold to receive full child tax credits. A $1,050 marriage penalty is created with their union. Not egregious, but not ideal.
Marriage Penalty Tax Example #3
Each spouse makes $200,000. They don’t own a home, and have two children. The results are the same if they have no children. A whopping $15,162 marriage penalty tax is created for these two high income earners.
Marriage Penalty Tax Example #4
Each person makes $200,000, but this time they have $45,000 in deductions from a mortgage and property taxes. They have two children under the age of 17. The deductions drop their total tax bill down to $92,089 from $104,987 in the previous example, but if they weren’t married, their combined taxes would only be $76,825 (17% lower).
Marriage Penalty Tax Example #5
One person makes $500,000, the other person makes $80,000. They own a home with a mortgage and have one child. Lucky for the person making $80,000 to marry the person making $500,000. Not so lucky financially for the $500,000 income earner. After 20 years, this person will have paid $270,000 more in taxes than if he had stayed single or not married with the added $13,434 in taxes a year.
Marriage Penalty Tax Example #6
Two people make $85,000 each and have no kids and no mortgage. It looks like $170,000 in total income is where the marriage income tax starts to kick in.
Marriage Tax Credit Example #7
One person makes $60,000, the other person makes $40,000. There is no mortgage and zero kids. We have a winner! Because the combined income is under $110,000, the couple can decide to have a kid and claim $1,000 per child to lower their taxes even further to $10,638 from $11,638.
Marriage Tax Credit Example #8
One person makes $50,000 and marries someone making nothing. They do not have a mortgage or kids. If they were to have kids, their $3,548 tax liability would decline by $1,000 per kid. If they decide to have three kids, not only will they not have to pay any taxes, they’ll “earn” about $700 bucks from the government every year. This is a fantastic income combination.
Marriage Tax Credit Example #9
Here is the beautiful scenario where one person makes $200,000 and one person makes $0. They have a couple kids (doesn’t matter), mortgage interest of $18,000, pay state taxes of $12,000, and charitable contributions of $1,000. Why HELLO $7,330 tax credit!
Marriage Tax Credit Example #10
Here is the real home-dinger. One person makes $300,000 and marries another who makes $0. They pay $35,000 in State taxes, $25,000 in mortgage interest, $2,000 in charity and have a child. The $300,000 a year earner saves $11,162 a year in taxes. I tried higher than $300,000 a year and the marriage tax credit starts to decline.
THE IDEAL INCOME COMBOS TO AVOID THE MARRIAGE PENALTY TAX
Based on my analysis, the ideal income variations to avoid paying the marriage penalty tax are:
1) Have a total adjusted gross income below $110,000 to be able to claim $1,000 per child tax credit. You still get some child credit after $110,000, but there is a drastic phaseout. Depending on deduction levels, owning a home with a mortgage will reduce your tax bill further. It seems that a total income level hovering around $100,000 enables couples not to pay a marriage penalty tax and potentially even get a marriage tax credit.
2) One person with a MAGI $300,000 or below marries someone with $0 income. Example #8 ($50,000 + $0) is a common example that helps many middle class Americans. Example #8 shows how you can pay no taxes and actually earn money with kids. Example #9 ($200,000 + $0) and #10 ($300,000 + $0) are also a fantastic scenario that can help those living in high cost areas. After $300,000, the marriage tax credit starts to decline.
3) A combined income of around $150,000 – $170,000 doesn’t create more than a $1,050 penalty (example #2). You’ve got to decide how much of a marriage penalty tax are you willing to pay for the benefits of being married. In examples #3 and #4, to pay an extra $15,000 in taxes a year seems egregious.
THE WORST INCOME COMBOS FOR MARRIAGE TAXES
1) When you have one super high income earner marrying a low income earner. For example, say you make $30,000 and marry someone making $600,000. Your $30,000 is no longer taxed at the 15% rate because it is added on to your partner’s $600,000 income to be taxed at the 39.6% rate. That said, I’m sure the one making only $30,000 will be pretty pleased!
2) Two high income earners getting married. The reason is because 1 + 1 = 1.25 or less e.g. $406,750 + $406,750 = $457,600 for the 39.6% marginal tax bracket for example. The government assumes one person in the marriage will downshift or quit their jobs. This really is the worst of the worst combos. It’s much better, from a financial perspective, to not get legally married until one of you is close to death. Remember, you want to get married for the Social Security and estate planning benefits.
Note: If same-sex couples plan to adopt, there is currently a federal adoption tax credit of up to $13,190 per child. The adoption tax credit is not a refundable credit, meaning you need to have at least $13,190 in federal income tax liability to be able to fully maximize the credit. The credit should only go up over time. Now if only governments around the world could make adopting one of the 100 million+ orphans easier.
MARRIAGE HAS ITS PLUSES AND MINUSES
Now that you know some of the financial positives and negatives of marriage, it’s time to have a heart-to-heart about your respective finances before tying the knot! Being on the same page financially, while actively communicating ones feelings cannot be overemphasized for a healthy marriage no matter who you love!
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Updated for 2020 and beyond.