When I was a bachelor, living in an apartment on the Upper West Side of Manhattan, my roommate Danny would constantly joke around, suggesting that we get married solely for tax purposes. He believed that getting married would bring all sorts of amazing perks and privileges from a tax perspective, and that we could save a lot of money by making the move.
While getting married can lower a couple’s overall tax bill, some dual-income affluent couples will actually experience the exact opposite; an uptick in the amount of cumulative income tax they pay after getting married. There are several reasons why couples may experience higher taxes when married, as opposed to single, but let’s focus on two of them, the ordinary income tax brackets and the net investment income tax.
Ordinary Income Tax Brackets
For some dual-income couples, the combined tax bill can be higher after marriage because the tax brackets for married joint filers are not always twice as much as the same income tax brackets for single filers. Notably, this is not a new issue. In fact, the Tax Cuts and Jobs Act of 2017 reduced the ordinary income tax brackets’ impact on the marriage penalty, yet it still exists for joint filers in the top tax bracket.
Here is a summary of the 2019 tax brackets for single and joint filers and the multiple by which income brackets differ:
Married Joint Filers
Ratio of Single / Married
As you can see, the amount of taxable income where the first six Joint Filers brackets begin are exactly double the amount of taxable income where the same tax bracket begins for Single Filer brackets. However, in 2019 Single Filers enter the top bracket of 37% when taxable income reaches $510,301, which is “only” about $100,000 less than where Joint Filers enter the same bracket. That means that two highly compensated individuals could pay more taxes as a married couple than filing separate individual tax returns.
Ken and Barbie are very successful models, who have each enjoyed the single life, and are now ready to settle down. Each of them is expected to earn $400,000 of taxable income in 2019. If they remain single throughout the year and file as Single Filers for 2019, they would each owe just under $115,200 in Federal income tax, or about $230,400 combined. Furthermore, each of them would have a top marginal rate of 35%, as their $400,000 of taxable income would keep them well below the $510,300 of taxable income necessary for a Single Filer to “break into” the 37% tax bracket in 2019.
Alternatively, suppose in 2019 Ken and Barbie get married and file a Joint return showing $800,0000 of combined taxable income. Now, using the Joint brackets, $187,649 of their joint income falls in the top tax bracket of 37% (which starts at $612,351!), and as a result, they end up with a total Federal income tax bill of over $234,000. That’s more than a $3,700 increase in Federal income taxes as compared to if they remained unmarried and filed Single returns!
Net Investment Income Tax
Not only is there a penalty when it comes to income taxes, but there is a penalty on a number of other taxes as well, including the 3.8% net investment income tax. The net investment income tax went into effect on January 1, 2013 as part of the so-called “Obamacare” legislation and imposes a 3.8% surtax on the lesser of a taxpayer’s net investment income (i.e., interest, dividends, capital gains, rental income, etc.) or Modified Adjusted Gross Income (MAGI) above certain thresholds. The MAGI threshold for a Single filer is $200,000, but the hurdle for married couples filing Joint is “only” $250,000! That’s just $50,000 more than the threshold for Single filers, which means that couples can easily see an increase in the amount of 3.8% surtax they owe after getting married!
David and Katheryn are engaged and set to be married. In 2019, they each file their taxes as a Single person, and each has MAGI of $195,000, which includes $20,000 of net investment income. Since the 3.8% net investment income surtax is calculated as the lesser of net investment income or MAGI above $200,000 (for individuals), neither of them would owe any of this tax as they only generate $195,000 of MAGI each which is less than the $200,000 hurdle.
Next year, however (2020), they are married (yay!) and file a Joint return. Now, they have a total MAGI of $390,000, which is $140,000 over the joint MAGI threshold of $250,000 (note that unlike the Federal income tax brackets, the thresholds for the 3.8% net investment income tax are NOT indexed each year for inflation) and includes $40,000 of net investment income. As such, they would owe additional tax of $1,520, calculated by multiplying the $40,000 of net investment income (because it is less than the $140,000 of MAGI by which they are over their threshold) by 3.8%.
Every situation is different, and while getting married can increase some couple’s tax bills, it can have the opposite effect for others. Still other couples may see little to no change in their combined tax bill after tying the knot. So, like most things, it’s often best to check with a knowledgeable professional to avoid any unwelcome surprises.
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