Planning on Getting Married? Consider the Tax Implications First!

As we all know, the process of getting married is already complex, but before tying the knot, it’s beneficial to consider how your income tax situation will change. It’s especially true for couples who plan to get married late one year or early the next, as deferring or accelerating income can bring advantages when it comes to saving on taxes. Likewise, it can be smarter to put off marriage until after the calendar flips, or possibly make sure it happens before the new year, depending on your circumstances.

To know the best option for you, familiarize yourself with the current tax brackets, both for individuals and couples filing together. For the two lower tax brackets (10% and 15%) the amount of taxable income is exactly twice as large for joint filers as it is for single taxpayers, meaning there’s no change in the amount you owe if you filed separately or together. Once you move beyond those tax brackets, however, income subject to taxpayers filing jointly is less than twice the amount for single taxpayers.

Incomes and Tax Rates

In 2016, for example, single taxpayers can earn $91,150 before they hit the 28% bracket. If they are married, any combined income over $151,900 is taxed starting at 28%. For joint returns, the 33% rate starts at $231,450, the 35% rate starts at $413,350, and the 39.6% rate starts at $466,950.

On the flip side, two unmarried taxpayers can have as much as $380,300 ($190,150 × 2) in taxable income before hitting the 33% bracket, $826,700 ($413,350 × 2) before being in the 35% bracket, and $830,100 ($415,050 × 2) before paying the 39.6% rate.

So what do all these numbers mean? Essentially, if both members of a couple earn roughly the same income, it probably makes financial sense to accelerate income into this year or push the marriage off until next year. In this case, individual filings will usually save you tax dollars.

If one member of the couple makes substantially more income than the other, conversely, it may make sense to defer income to the following year or tie the knot before year end. When one of the prospective spouses earns the vast majority of the income, a joint return will save taxes. Here are some examples:

Should We File Separately or Together?

Let’s say Rachel expects to earn $300,000 in taxable income in 2016, and Jack expects to earn $250,000. If they get married in 2016 and file a joint return, they will owe $163,466.30 in taxes on the joint income of $550,000. If they delay their marriage until 2017, Rachel will owe $82,529.25 in 2016 taxes while Jack will owe $66,029.25, for a total combined tax of $148,558.50. So by waiting to marry until 2017, they save $14,887.80.

In another scenario, let’s say Rachel expects a taxable income of $525,000, while Jack expects $25,000. If they marry in 2016 and file jointly, they will owe $163,466.30 in 2016 income tax. If they delay marriage until 2017, Rachel will owe $164,069.95, and Jack will owe 3,286.25. Their combined total of $167,356.20 is $3,889.90 more than their total if they filed a joint return in 2016. In this scenario, it makes more financial sense to get married before year-end and file jointly.

Remember, since the Supreme Court struck down Section 3 of the Defense of Marriage Act, these guidelines are equally relevant to same-sex couples, who can now legally marry in all states.

No matter what your situation is, speaking with a knowledgeable planner can help clarify it. The sooner you act, the better your chance to save money!

Estate Planning & Tax Preparation with Cohen & Burnett

For over 25 years, Cohen & Burnett has provided Washington, DC area residents with Tax Strategies and Estate Planning and Implementation. For more information on our firm and our broad base of experience, please visit our homepage today.

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