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Planning for the Marriage Penalty

08-21-2017

Married filing jointlyBy Shane R. Fisher

Wedding season is in full swing, but engaged couples should be planning now for more than just the big day. When it comes to federal income taxes, two may not be able to live as cheaply as one, regardless of the old axiom.  A little advance planning may save the happy couple from the unhappy consequence of needing to pay the dreaded “marriage penalty.”

The marriage penalty happens when two individuals marry and their combined income is taxed at a higher rate by filing as “married filing jointly” rather than “single” or “head of household.”

Tax code

An update of the tax code is long overdue. With tax reform as a cornerstone of last year’s presidential election, there is much anticipation to how the marriage penalty will be eased regarding federal income taxes.  The current federal tax code reflects an earlier time when women traditionally earned much less than men if they worked outside of the home if there was a second income at all. Essentially, a married couple is penalized today for having two successful careers.

How to soften the marriage penalty

The first step to avoiding a mid-April federal tax surprise relies on one of the core foundations of a healthy marriage: communication. This is especially important if a couple plans to maintain individual bank accounts and pay separately for select household expenses – for example, one pays the mortgage and real estate taxes while the other pays for utilities and groceries.  In some cases, these kinds of arrangements leave the couple in the dark about their joint income – and can lead to a nasty surprise come tax time.

Once a couple knows their household financial income, there are ways to avoid a big tax bill.  Obtain a W-4, the Employee’s Withholding Allowance Certificate, from the human resources office and increase the amount your employer withholds from each paycheck if you anticipate having to owe federal income taxes. The couple should project how much they expect to earn during the year and then, for the sake of planning, increase that amount by a small percentage as a buffer to make sure their tax liability is covered. A tax professional can help the couple determine who can best afford to increase withholding early in the year they will be wed.

Pre-marriage planning with the assistance of a tax professional can reduce or eliminate the amount of federal taxes due when the first or second joint return is filed. Remember, the IRS considers your status on December 31 as your status for the entire year, so if you are married at any time during the year, the IRS considers you to be married for the whole year.

No simple solution

Even with the best of planning, the marriage penalty can still strike newlyweds. Several years ago, a friend and his fiancé planned ahead and adjusted their tax withholding before the wedding, since their combined income would put them into a higher tax bracket. Unfortunately, and regardless of their careful planning, they still owed several thousand dollars on their joint tax return.

There are several solutions available for couples who want to avoid the marriage penalty. One spouse can choose to work less, perhaps move from full-time to part-time employment, or a couple can choose to remain unmarried.  In my experience, I find most couples decide they would rather be married and enjoy their higher joint income, so they take a deep breath … and pay the taxes.

Shane R. Fisher is a supervisor at Boyer & Ritter LLC, where he provides audit, accounting and tax services for a variety of clients and industry groups. Contact Fisher at 717-761-7210 or sfisher@cpabr.com.

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