Wedding Blog

For those readers in the U.S., Happy TAX DAY!

In my post titled, “What is Different about Marriage“, I briefly mentioned the “Marriage Penalty” and some readers asked if Mr. Cookie could do a guest blog about it. So, in honor of the day, I asked him to do just that. With an MBA in Finance and a job as a Financial Analyst, Mr. Cookie is the financial brain of the Cookie clan. Please note that Mr. Cookie is not a CPA, and you should consult a tax professional about your particular financial situation. Okay, without further ado, Mr. Cookie:

Hi, hive! Mrs. Cookie asked me to write-up a post about the “Marriage Penalty”. I hope this post will give you a glimpse into your taxes after you’re married.

Everybody loves marriage, especially the U.S. Government. Now, why does the government like marriage? The answer is simple: money. Wait a minute; isn’t marriage supposed to save you money? The answer is, in most cases, no.

Certainly living together saves you money. Less rent (or mortgage), less utilities, and less food are all great ways to save money when you combine your households. It may even come with less time spent on housework (at least for one of the lucky cohabiters ;)). But does marriage save you money? Let’s take a look at the tax structure, shall we?

Let’s say you are a low-income earner and make the maximum adjusted gross income (after exemptions and deductions) of the first 2008 tax year tier. You’d be making $8,025 per year and taxed on 10% of that income, which is $802.50. And say your potential spouse makes the same amount, thereby doubling your income to $16,050. How does this affect your taxes? Let’s take a look at the table. It just so happens that the top of the first tier for married couples is $16,050, the same as if you were to double the single tier, which means the same taxes. No problem right? Well, no problem if you both don’t have deductions, which we’ll talk about a little later.

Now let’s take a look at the next tier. The top of the second single tier is $32,550, and for married couples $65,100. Still double; so far, so good. Third tier: single - $78,850, married - $131,450. Wait a minute! If you double $78,850 it should give you $157,700, not $131,450. Where did that extra $26,250 of taxable income go? Well that, my friends, is where the marriage penalty begins. Instead of taxing you at the bargain rate of 25% on the entire third tier income for singles and doubling it, it decreases that spread by $26,250. Which means you’re paying the low, low rate of 28% on $26,250 ($7,350) instead of the 25% rate ($6,562.50), or 3% more ($787.50). If you had both earned identical amounts and stayed single, you’d be better off. And it gets worse the more you make. The fourth tier for single is $164,550, and for couples $200,300—a $35,750 spread—and so on, as you move up the ladder.

Not fair? You bet your sweet bippy it’s not fair. But hold on to your hats, we’re not done with this crazy ride yet. Remember when I spoke of deductions? Well, here’s the skinny on that.

Typically, you will get the larger of the standard deduction set by the government, or your itemized deductions. Generally, if you don’t have a mortgage or a business, you don’t need to worry about itemized deductions. However, if you do own a home: beware! In 2008, your itemized deduction per person is $5,450. Luckily, it stays the same if you’re married and each person gets their standard deduction and, when combined, equals $10,900. That’s $10,900 of non-taxable income we’re talking about here. So let’s say one of you lucky brides or grooms-to-be owns a residence. The mortgage interest, property taxes, and other deductible expenses would be used to offset your income. Let’s say the bride owns the home and has $15,000 in deductible expenses ($15,000 less income she’s taxed on). The groom-to-be, who is cohabiting with the bride-to-be, doesn’t own a residence and gets his standard deduction of $5,450. Added together ($15,000 plus $5,450), this gives you $20,450 of income that is not taxable. Sweet! But here comes the sour: when you get married, say goodbye to the groom’s $5,450 deduction. Flush… down the drain. As a married couple, because you hypothetically share resources, you also share your itemized deductions. Your deduction has now been reduced to the $15,000 plus the minor deductions (usually state income tax) the groom has. Hence, you now pay taxes on an additional $5,450 which at the lowest tier, 10%, is $545 more!

What a bum deal. You get married, and then you get bumped into a higher tax tier and get deductions taken away!

Now, there are some situations where it is beneficial, such as when you have one very high earner and one that earns little-to-none. This widens the taxable tiers, and includes more of the higher income earner’s wages in a lower bracket. For those of you eventually planning to stay home to raise the kids, you will eventually get some of this advantage. Of course, you still have the deduction issue. Now, why not file as married filing separately? No luck. They’ve already altered your tiers to the married levels and, in some cases, you can’t take as many deductions or credits.

So what does this all mean? Well, anecdotally, love comes with sacrifice. And to still marry someone knowing the financial burden of additional taxes tacked on must mean that you really do love that person!

Happy tax day, you crazy newlyweds!