Find out why married couples may be penalized, benefits of getting hitched, and how to reduce your taxes. Get the Money Girl book at http://MoneyGirlBook.com
Money Girl
344 MG What Is the Marriage Tax Penalty?
Building a portfolio with Fidelity Basket Profolios is kinda like making a sandwich. It's as simple as picking your stocks and ETFs, sort of like your meats and other topics. And managing it as one big juicy investment. That's pretty good. Learn more at Fidelity.com/baskets. Investing involves risks including risk of loss, Fidelity Brokers Services LLC, Member NYSC SIPC. When you hear a good idea, it's natural to do a double take. That's what you might do when you hear "discover" will automatically double the cash back you've earned on your credit card at the end of your first year with cashback match. Wait. What? Yup. Double the cash back is something so good you might do a triple take. It pays to discover. See terms at discover.com/creditcard. Hi everyone, I'm Laura Adams and you're listening to the Money Girl Podcast. A show listener named Jenna asks, "I recently got engaged and a friend mentioned something about a marriage tax penalty. Can getting married actually cost more than staying single?" Once you've found true love, there are many great reasons to get married. But if you're like Jenna, you may also wonder whether tying the knot could actually hurt your finances instead of help them. In this episode, you'll learn who gets the short end of the financial stick for getting married, how wedded couples can avoid paying too much tax, and five financial benefits of getting hitched. The marriage tax penalty can occur when a couple filing a joint return pays more income tax than they would have if they remain single and filed as individual taxpayers. The United States uses a marginal or progressive tax system where earning more income means you pay higher rates of tax. So combining spouse's income can result in getting taxed at a higher rate than taxing each person as a single. For instance, let's say John and Sue both earned $35,000 in 2013. As singles, each one would owe a little over $4,800 in income tax. Now, if they get married and file income of $70,000 on a joint return, they would owe exactly double or just over $9,600. That seems fair, right? Well, let's say they're high earners, making much more. They're each making $150,000 each. As singles, each one would owe about $35,000 in taxes for 2013. So getting married seems like it would double their taxes for a grand total of $70,000. Well, guess what? As a married couple earning $300,000 combined, they would owe just over $75,000, which is $5,000 more than what they pay as two single taxpayers earning $150,000 each. Since tax rates at higher income brackets for couples are not double that for singles, combining income can result in higher taxes for couples. For reference, I'll include the income tax tables so you can see for yourself what I'm talking about on the money girl page at quickandertietips.com. But even for lower tax brackets, when spouses have substantially different incomes, there can still be a marriage penalty of sorts. For instance, a stay-at-home spouse or one who only works part-time for a low wage would pay no or very little tax if he or she filed as a single taxpayer. But as one half of a married couple, his or her share of the household tax can be much higher. And the reverse is true for the spouse who earned substantially more than the other. He or she actually gets a marriage tax bonus instead of a penalty. A marriage bonus occurs when you pay less tax as a married couple than you would as two singles with the same income. This typically happens when a lower income spouse pulls down the higher earning spouse into a lower tax bracket, which reduces overall taxes as a couple. Other marriage bonuses can occur when you qualify for tax deductions or credits as a couple that you wouldn't get as two singles. I'd recommend that Jenna find out whether she and her fiancé will get a marriage tax penalty or a marriage tax bonus by using the marriage bonus and penalty tax calculator at taxpolicycenter.org. But I doubt that Jenna will have to call off her engagement due to taxes. Fortunately, a study from the Congressional Budget Office showed good news. Most couples who filed jointly get a marriage bonus and pay less tax than if they weren't married. Here are five benefits you get from being married. Benefit number one is a spousal IRA. This is an individual retirement account that one spouse is allowed to fund for another who doesn't earn income when you file jointly. On the other hand, a single filer without income never qualifies for an IRA. Having an IRA allows a married person who has no income to save up to $5500 or $6500 if you're 50 or older for 2013 or 2014. Now that we're in Q4, it's a good time to start thinking about making memories with the people you love most before the end of the year. We put a lot into the time we spend with our loved ones. So you want to extend that care, comfort, and peace of mind to what happens when you're gone. 41% of people don't have the life insurance coverage they need. Policy genius makes finding and buying life insurance embryos. With policy genius, you can find life insurance policies at start at just $292 a year for a million dollars of coverage. And some options are 100% online and let you avoid unnecessary medical exams. Policy genius combines digital tools with the experience of real licensed agents. You can compare quotes from America's top and shores side by side for free with no hidden fees. They have an amazing licensed support team that helps you get what you need fast so you can get on with your life. They answer questions, handle paperwork, and advocate for you throughout the process. Policy genius is the country's leading online insurance marketplace. And even if you already have life insurance through work, remember it may not protect all your family's needs or follow you if you leave your job. So save money and time on providing a financial safety net for your family. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then iXcel is a right for your family. iXcel is an online learning program for kids covering math, language arts, science and social studies. iXcel has interactive practice problems for topics from pre-k to 12th grade and everything is organized by grade and subject. As kids practice, they get positive feedback, awards, and explanations for wrong answers. iXcel figures out what your kids need more help with and recommends more topics to practice. Their videos, lessons, sample problems, and learning games too. One subscription to iXcel gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder iXcel is used in 95 of the top 100 school districts. I think the positive feedback that iXcel gives is really crucial when it comes to learning. So make an impact on your child's learning. Get iXcel now and money girl listeners can get an exclusive 20% off iXcel membership when they sign up today at ixcel.com/moneygirl. Visit ixcel.com/moneygirl to get the most effective learning program out there at the best price. If the new chicken big mac at McDonald's looks like a big mac has sweet buns and sauce like a big mac but has two chicken patties, then it's not not a big mac. I participate in McDonald's for a limited time. Benefit number two, the estate tax exclusion. This allows a surviving spouse to transfer an unlimited amount of assets into his or her name without any federal tax penalty when their spouse dies. Generally, heirs must pay tax when they inherit assets valued over a certain amount, but this doesn't apply to a surviving widow or widower who was married. Benefit number three, the home sale exclusion. This allows you to avoid paying tax on up to $250,000 of profit on the sale of your primary residence, but it gets even better when you're married. A couple gets a tax break that's twice as nice or $500,000. Even a surviving spouse can claim the entire half a million dollar exclusion on gains from the sale of his or her main home. Benefit number four, tax deductions. Any that are based on income such as for charitable contributions may make it easier for dual income couples to qualify and claim them. Additionally, some tax credits are only available to a married couple when they file a joint tax return. And the fifth benefit is workplace benefits, like health insurance, medical savings accounts, and life insurance. They may be richer or cost less for a couple than individually. If both spouses have benefit packages at work, the right mixture from two plans can be more valuable than only having one plan to choose from. But there are drawbacks to filing taxes as a couple. The biggest one is that signing your name on a joint tax return makes you completely responsible for it. Even if you didn't personally crunch the numbers or know anything about mistakes or spouse may have made completing a return, you're generally on the hook. Each partner accepts equal responsibility for any additional tax or penalties that may arise from problems with a joint return. If you're already married, you can't go back in time and file taxes as two singles, only as married filing jointly or married filing separately. You or your accountant should calculate your taxes each way, each year, and choose the filing status that saves you the most. Always consult with a qualifying tax professional when you have a complex situation or have questions. And if you're newly married, make sure to complete a new Form W4, which is the employees withholding allowance certificate for your employer. You can use the IRS withholding calculator at irs.gov to help you figure the right amount of withholding and make sure that you don't have too much or too little taxes withheld throughout the year. If we haven't connected on social media yet, please visit Facebook and do a search for MoneyGirl. On Twitter, you'll find me under username @laraatoms and I'm also on Google+. Everything I've mentioned is on the MoneyGirl page at quickanddirtytips.com. To read a transcript of this show, look for episode number 344 called "What is the Marriage Tax Penalty?" I'm glad you're listening. Ching. That's all for now. Courtesy of MoneyGirl. Your guide to our richer life. Cheers to fall at Whole Foods Market with sales through October 29th. Select frozen pizzas are 50% off with Prime, so stock up and be ready for game day. Hosting a cozy dinner? 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