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.
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.
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.
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.
- The NY times marriage tax calculator
What do you think? Are we throwing money away? How do you reconcile the financial, emotional and legal aspects of marriage?