Should I Get Divorced?

The marriage tax

Mr. BITA and I are both software engineers. We each make a good living and our incomes are nearly equal. We got married in 2013, and at the time of our marriage we were the polar opposites of financial wizards. Financial dimwits. Financial dum-dums. We had money sitting in our savings account earning an obscenely small return and losing to inflation. Mr. BITA did not contribute to his 401k. Given this abysmal state of affairs it should come as no surprise that we never gave the marriage tax a second thought.

What is the marriage tax?

At certain income levels, if your spouse and you make close to the same amount of money, then if your tax filing status is Married Filing Jointly (MFJ, or as Mr. BITA fondly refers to it, MotherF-ing Jacked-up Taxes), you will pay more tax combined than the sum of the tax that you were paying when your filing status was Single. This wonderful phenomenon is fondly known as the marriage tax.

The marriage tax results because of the way the federal tax brackets are set up. At higher levels of taxable income the MFJ tax brackets are not double the size of the Single brackets. Graphically, this is what the marriage tax looks like, if we assume two people making exactly the same amount of taxable income. The red line shows the taxes owed if these two people file under MFJ, the blue lines shows taxes owed if the same two people filed as Single taxpayers.

The marriage tax: single vs married filing jointly

 

At the 10% and 15% marginal tax rates, the MFJ bucket is twice as wide as the Single bucket, and so the red and blue lines overlay each other in the lower left corner of the graph. The 25% bucket lasts up to $91,150 in taxable income for Single filers, but slams shut at $151,900 for MFJ filers. Since $151,900 is not double $91,150, MFJ filers at this marginal rate start to pay higher taxes. And it just goes downhill from there.

What is the lifetime cost of the Marriage Tax?

Ok, so the marriage tax exists. Boohoo. How bad can it possibly be?

Let us consider a hypothetical couple with a joint taxable income of $466,950, each generating $233,475 taxable dollars. If they were not married and filing as Single, they would each be in the 33% marginal tax bracket and would together pay a total of $121,152 in federal taxes. If they file as MFJ they end up in the 35% marginal bracket and pay $130,578.50 in federal taxes.

So at this income level, marriage is costing this couple $9,426.50 every year.

Let us assume that this couple hit this oh-so-comfortable level of income at age 35. Assuming a 7% rate of return over a period of 20 years, investing $9,427 a year results in $449,997.

You read that right. Over a period of 20 years the marriage tax cost our high income earners close to half a million dollars!  The only appropriate response to that is Holy Fuck.

Let us consider a more modest case study. Couple #2 has a taxable income of $231,450. Filing as single would cost this couple $50,879.50 and MFJ comes out to $51,791.50. That works out to $912 a year, or $43,534 over a period of 20 years. Not as dramatic as half a million dollars, but nothing to sneeze at either.

To top it all, this naive computation does not even take into account the earlier phase out of certain deductions and exemptions that occur when MFJ. For example, the Pease limitations on itemized deductions for a Single Filer set in at $259,400, while for MFJ it is $311,300. To salt the wound further, this article by Forbes claims that the IRS offers single taxpayers who co-own a home double the mortgage interest deduction available to married taxpayers”.

What exactly does legal marriage get you?

Now before you run off to shred that marriage certificate or decide that you will live lovingly in sin forevermore, take a deep breath, pour yourself a nice adult beverage and let me lay out the pros of legal marriage for you. Oh, wait. If I actually wanted to lay out all the pros I’d need a thesis, not a blog post. According to the U.S. Government Accountability Office there are 1,138 provisions “classified to the United States Code in which benefits, rights, and privileges are contingent on marital status or in which marital status is a factor”.

So, on the one hand you could save half a million dollars. On the other hand you have 1138 provisions to pore over, find which apply to you, and then figure out which of those rights you can either reproduce with an appropriate legal document or decide to live without. You could hire a lawyer to do this for you (and thus immediately wipe out a large-ish portion of the money you were hoping to save in the first place).

You can definitely use various kinds of power of attorneys and wills and trusts to simulate some of the benefits of legal marriage without assuming the tax burden. There will be plenty more though that you will just have to do without. A few that come to mind (without me spending a lifetime poring over the U.S. Code) are:

  • Immigration. You can’t help your domestic partner. You can only help your spouse achieve residency and citizenship.
  • Social Security Benefits like survivor’s benefit for your spouse.
  • Depending on your state laws and employer, whether or not you can cover your partner on your employer’s health plan (we can; we don’t need to be married for this particular benefit).
  • The ability to use the Family and Medical Leave Act to care for a spouse (CA has expanded the federal law to allow for care of a domestic partner as well, but many other states have not).  

In the final reckoning though, for most people, this will not be a conversation about $500,000 vs. 1,138. This will be an emotional conversation about the meaning of marriage, and not a financial one.

What Marriage Means to Me

Mr. BITA and I were legally married in India in the town where my parents own a home. We did this with only our parents, siblings and few close friends in attendance. It was an informal affair at home, followed by a home cooked meal. My parents certainly did not consider us married after this legality was out of the way – they still insisted that we slept in different bedrooms in their house (despite the fact that we were already living together in San Francisco and they knew it. Sometimes Indian parents can be weird)! A few days later we all traveled to Goa and we had a (big by Mr. BITA’s standards, small by Indian standards) wedding on a beach. It is this ceremony on the beach that I consider to be my wedding.

Our beach wedding

This is the date on which we celebrate our wedding anniversary. What was meaningful to me was our exchanging vows and rings witnessed by the people that we love, the act of committing to each other for a lifetime. I did not need the legal ceremony to make my marriage feel real. I did not feel that I needed the government to legitimize our union. Truth be told, the legal ceremony just seemed practical at the time because it would shorten my path to a residence permit in the U.S. (my employer was processing an employment based resident permit for me, but that can take up to ten years or longer). To me the legal aspect of our wedding was a matter of convenience. Of taking advantage of all the things that came easy (immigration, bank accounts, etc.) in not one, but two countries, because we signed the legal papers. I recognize the fact that this view of legal marriage may be somewhat naive. If my marriage were to fail I would probably be glad of the legal protections and rights I am afforded by virtue of being legally married.

Our wedding vows

Half a million dollars is a lot of money. But Mr. BITA and I are going to hang on to our marriage certificate for a while longer and settle for the peace of mind of continuing to have those 1,138 provisions working for us.

Resources

What do you think? Are we throwing money away? How do you reconcile the financial, emotional and legal aspects of marriage?

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25 thoughts on “Should I Get Divorced?”

  1. Mrs. SSC and I ran into that problem the first year we filed taxes married with our new jobs. We owed $7700 because we (stupidly) assumed that having our W2’s set at 0 dependents and single and anything else to take out more taxes would cover it. It didn’t. When we filed we found out our tax rate went from our single income rate to our joint income rate and we have to cover the difference. Man was Mrs. SSC furious. 🙂

    We had to get work to take out an additional $300/paycheck in taxes to buffer the difference. It was fine after that, but I know Mrs. SSC got stressed every year around tax time. She’d start filing them as the papers would come in and we’d go from “owing $4k!!” to “getting a refund!!” back and forth… It’s kind of comical, kind of.

    I think we’d only divorce if I found out I was terminal or something along those lines. Just transfer everything to her name, get a divorce, and try and protect the assets from the medical world. Of course I haven’t really discussed this with her, but it seems the most logical approach to me. 😉

    1. I think that that may have been the biggest positive of our financially dim years – the marriage tax kicked in, and we didn’t care. It was easy come, easy go. I wasn’t stressed out because I was too stupid to give a damn.

      Protecting assets is an interesting reason to get a divorce. I know nothing about how any of that works though.

  2. I’ve heard several young men comment on the marriage tax and cite it as one reason they don’t want to get married. Personally, I think I would be ok filing as MFJ as I doubt my income will ever be enough to get penalized so heavily. Unless I marry someone with an incredibly great income, of course!

    1. I suspect those fine young men are probably using the marriage tax an an excuse to paper over their fear of commitment : )

      The marriage tax tends to penalize high earners with equal incomes. If you file MFJ and your spouse’s income is much higher than yours you will probably benefit from the marriage bonus. Yes, that is a thing too.

    2. It is an extremely small subset of couples who are negatively effected by the tax effects of MFJ. That excuse is more transparent than most of Barney Stinson’s playbook.

  3. Wow, that is some crazy money missed out on for matrimony! We’ve had some friends who seriously considered divorce in order to keep more of their income, but they came to the same conclusion you did. Mr. COD and I discussed it once hypothetically. While we’d both have a hard time reconciling ourselves to a divorce on an emotional level, if our finances were dire enough, we’d have to trust in our own inner commitment. I love Mr. BITA’s vows and your wedding dress, by the way!

    1. I loved his vows too (we decided not to show each other our vows in advance); it made me tear up during the ceremony.

      We were hypothetically discussing the divorce scenario as I was doing the research for this article, and we learned something about ourselves. For me it was purely a discussion of what is more practical and financially beneficial, and in the end it was all about the impracticality/expense of finding a lawyer to help us ‘simulate’ marriage benefits to avoid the marriage tax. For Mr. BITA it was a lot more emotional – he didn’t like the idea of even hypothetically discussing a divorce. It was surprising to learn that the legal paper means more to him than it does to me.

  4. I was recently thinking about writing a post about how you should almost always file jointly, but 2 high income earners was the one big caveat. A low six figure income is just about perfect for us (single income household) since we contribute the max to our 401K, 11,000 to Traditional IRAs, mortgage/property tax deductions, charity deductions. After deductions our taxable income always pushes us into the 15% tax bracket.

    I guess I should thank you guys for paying more for the public services we use. I kid. But seriously, I think a lot of people don’t realize the difference between people who earn higher salaries on their W2’s and people who earn their money from investments. Long term capital gains are favorable to investment income, but our tax structure sucks for couples like you.

    Anyways, cheers. I guess once you retire you will enjoy the benefits of being able to stash a lot of money away during your working years despite paying loads of taxes. And your tax bracket will hopefully go down.

    1. Marriage bonus is a real thing, just like the marriage tax is. It all depends on where you land in the tax brackets. Sadly, the penalty area is not restricted to two high income earners. There is another penalty zone at the low end. The bonus area largely lies in the middle.

      I am looking forward to living off of our investments while we wallow in the warm waters of the lower tax brackets. Just a few more years to go!

  5. This is a fascinating approach to discussing the marriage tax! At the end of the day, I didn’t think about the financial pros and cons too much when I decided I wanted to marry my wife. Six years later, I still don’t think about too much – and I think that’s probably a good thing! 🙂

  6. Great discussion! The graph you shared, of course, is for a couple with two people earning the exact same amount. In our case, we’ve always had extremely disproportionate incomes. I’ve considered writing a post about the “singlehood tax” that we effectively pay because of it. Ultimately, there are some decisions that shouldn’t come down to just finances, and this is probably one of them 🙂

    1. Yep, your situation sounds ripe for the marriage bonus, which is as real as the marriage tax.

      If we all only made purely financial decisions, the human species would die out pretty soon because it would never make sense to have babies and fund them to adulthood. So yes, it isn’t always about the cold, hard cash.

  7. We didn’t think much about this at marriage but you are very much correct. I guess they assume overall expenses are lower per person for a couple so we can afford to pay. Then again one kids are born the situation changes again. Congratulations, it’s a deduction. Granted that’s a fixed amount, hence the widening gap.

    1. “I guess they assume overall expenses are lower per person for a couple so we can afford to pay.” Ah but the tricky bit is that they don’t assume this for _all_ income ranges and tax brackets. At the low end and the high end there is the marriage tax, but in the middle there is the sweet spot where there is actually a marriage bonus.

  8. I believe that the Trump tax plan is going to get rid of the marriage tax penalty and should make it neutral in the future. Here’s hoping that it goes that way. I definitely am not in favor of taxing a group of people more just b/c they chose to make a decision 🙂

    1. If you make it neutral then that means either you have to get rid of progressivity (which hurts poor people) or treat couples making the same joint amount differently depending on who is making how much (as they do in countries that only tax individuals). There is no mathematical way to get rid of the marriage bonus/penalty otherwise.

      1. Exactly. Getting rid of progressive tax brackets is not really “neutral” in my opinion – you will hurt one set of people more than another. And if you tax as individuals the couple who makes (100 + 100) is probably better off than the couple making (200 + 0) even though the total income they bring in to the household is the same.

    2. I’d be interested to see how they plan to do that. It seems not so straightforward to come up with a plan that penalizes nobody. For example, lets say we implement the naive fix of making the married tax brackets exactly double the width of the single tax brackets. Presumably this would mean that being taxed as two individuals is exactly the same as being taxed as a couple. On the surface this may seem fair, but it does penalize single earners. e.g. Lets say if you make $200000 you are in the 30% bracket, but if you make $400,000 you are in the 35% bracket. Under this new scheme a couple making $200000 each would remain in the 30% bracket (because the married brackets are now twice as wide as a single bracket), but a single person making $400000 would pay 35% tax. I hope they truly come up with a plan that is ‘neutral’, but I would be surprised if that was the case.

  9. My partner and I make unequal salaries. He also only works part time and I work full time. Since we aren’t married, we file our own taxes. I keep thinking how much I would save each tax time if we would just get married. I don’t think lower taxes are a good reason to get married, though, just like I don’t think they’re a good reason to get divorced.

    Thanks for linking to the Forbes article-Mr. Beach Life and I have each been claiming half our our mortgage interest but it looks like we don’t have to…I will be talking to a CPA about this!

  10. In all my years of personal financing, there’s nothing I ignore as hard as I do the marriage tax penalty. I delayed our marriage for almost a decade over other financial reasons (supporting my family and not wanting to bring that obligation into our marriage so early), it was too unreasonable of me to say that we still couldn’t get married because Money! 😉

    So I find other ways to counter that penalty all while pretending it doesn’t exist. Totally rational! A side effect is I’ve never had the discussion with PiC so I don’t know for sure how he feels but I suspect I know.

    1. Yeah I imagine that PiC’s credulity would have been stretched thin if you started to blab on about the marriage tax after making him wait a full decade! For those of us who have ventured down this path of happy matrimony it is best to focus on the over 1000 purported benefits and do our best to ignore the tax.

  11. I know what nicoleandmaggie are saying rings true economically but to us it really feels like paying more for the “privilege” of being married and we don’t like it. It was part of why we were avoiding getting married for a while. It’s annoying that filing jointly results in a lower tax bill than filing separately because our views of marriage don’t involve combining our finances, so it leaves us with a bit of juggling to do around who owes what of the tax bill in April. I try to not complain about it too much though after I was told the only reason we have a large penalty is because we can afford it at our income.

    1. Oh I don’t like it either. We’d have to be crazy to _like_ it.
      And for the record, I think complaining about this is fine. We aren’t complaining about paying more in taxes than people who make less. We’re complaining about paying more than people with the same amount of income as us. Complain away!

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