Two can live as cheaply as one, the old saying goes. Except for some high-income taxpayers.
Although the Tax Cuts and Jobs Act mostly eliminated the so-called — and hated — marriage penalty, some taxpayers, particularly high-income couples, could still end up paying more in taxes as a married pair than they would if they were each single.
The penalty typically kicks in when two individuals with equal incomes marry, bumping them into a higher tax bracket than they would be otherwise, said Mike Savage, a certified public accountant and CEO of 1-800Accountant.
“The Tax Cuts and Jobs Act attempted to eliminate the marriage penalty but it only pushed it out farther,” Savage said.
Under the new rules, which took effect last year, the marriage penalty kicks in for married couples with combined income of about $600,000 or more. At that point, married couples hit the top 37% federal income tax bracket. In contrast, a single filer reaches the 37% bracket at around $500,000, meaning an unmarried couple could enjoy income of $1 million before reaching the top bracket.
For example, an individual can have up to $200,000 in income before the Medicare surtax kicks in, but the limit for married couples is only $250,000.
Similarly, the net investment income tax also starts at $200,000 for single taxpayers, and $250,000 for married couples who file jointly.
In addition, long-term capital gains rates are 15% for single individuals up to $434,550 of taxable income and then rise to 20%. But for married couples, the 15% rate goes up to $488,850 of taxable income and jumps to 20% from there.
In every case, the penalty is not a specific tax, but rather the result of reaching a certain threshold sooner as a couple filing their taxes jointly. As the percentage of women in the workforce increases, along with their earnings in relation to men, more couples experience that tax hit.
No matter when you get married during the year, come April, you’ll need to file your 2019 tax return as a married couple.
On the flipside, if you get divorced at any time, you’ll file as single in the spring.
“Your marital status for tax purposes is whatever your status is on Dec. 31 of each year,” said Robert Rehm, a vice president of tax services at Mariner Wealth Advisors. “If you get divorced on the last day of the year, for tax purposes, you are treated as being unmarried for the entire year.”
However, splitting up to avoid the penalties rarely makes sense, since there are other tax advantages that come with filing jointly.
“If you were going to get unmarried, you are throwing away other benefits” said Dave Stolz, a CPA and member of the American Institute of CPAs’ personal financial specialist committee. These include spousal individual retirement accounts, which let couples double up on retirement savings even if only one spouse works, and tax exemptions on estate transfers, also known as the “unlimited marital deduction.”
“It’s a step over a dollar to pick up a dime kind of thing,” Stolz said.