Year-End Planning: Tax Brackets and the Marriage Penalty

As if you didn’t already have enough things to consider when planning your wedding, postponing or accelerating your wedding date could help you come out ahead from a federal tax standpoint.

While the lower brackets (10% and 15%) are exactly twice as large for married taxpayers filing jointly as the amounts for single taxpayers, the brackets above 15% actually have a marriage penalty built in.

Take a look at the table below:CPA, Paul Glantz, Austin, TX, Taxes, BusinessFor example, in 2016, unmarried taxpayers can each have $91,150 of taxable income and remain in the 25% bracket. If these same taxpayers were married, they would be in the 28% bracket with $182,300 ($91,150 x 2) of income. The 25% married filing joint bracket is not double the single 25% bracket (single 25% bracket: end at $91,150; married joint 25% bracket: ends at $151,900).

As the marginal rates increase, there is even more of a penalty. Looking at the top brackets, a single taxpayer can make $415,050 before entering the 39.6% bracket, while a married couple would enter this bracket at $466,951. If two single taxpayers were earning $415,050, that would equate to $830,100, and both would still remain in the 35% bracket. If these same two taxpayers were married, $830,100 of income would push them well into the 39.6% bracket.

To illustrate, here is another example. Michael and Mary are planning to get married. Mary expects to have $300,000 of taxable income in 2016, and Michael expects to have $250,000. Their combined taxable income for 2016 will be $550,000. If they get married before 2017, and file a joint return for 2016, they will owe income taxes for 2016 of $163,466.30. If they delay their marriage until 2017, then for 2016, Mary will owe taxes of $82,529.25, and Michael will owe $66,029.25 for a combined tax of $148,558.50 . This will be $14,887.80 less than they would owe if they married in 2016 and filed a joint return for 2016.

It’s not all bad news, though. If only one of the prospective spouses has substantial income, marriage and the filing of a joint return will usually save taxes, thus resulting in a marriage bonus.

Recently Divorced or Seperated? Here’s What You Need to Know

While taxes may be the last thing on your mind when going through a divorce, these events can have a big impact on your income. Alimony and a name or address change are just a few items you may need to consider. Here are some key tax tips to keep in mind:

  • Child Support.  Child support payments are not deductible and if you received child support, it is not taxable.
  • Alimony Paid.  You can deduct alimony paid to or for a spouse or former spouse under a divorce or separation decree. Voluntary payments made outside a divorce or separation decree are not deductible. You must enter your spouse’s Social Security Number or Individual Taxpayer Identification Number on your Form 1040 when you file.
  • Alimony Received.  If you get alimony from your spouse or former spouse, it is taxable in the year you get it. Alimony is not subject to tax withholding so you may need to increase the tax you pay during the year to avoid a penalty.
  • Spousal IRA.  If you get a final decree of divorce or separate maintenance by the end of your tax year, you can’t deduct contributions you make to your former spouse’s traditional IRA. You may be able to deduct contributions you make to your own traditional IRA.
  • Name Changes.  If you change your name after your divorce, be sure to notify the Social Security Administration. File Form SS-5, Application for a Social Security Card. You can get the form on or call 800-772-1213 to order it. The name on your tax return must match SSA records. A name mismatch can cause problems in the processing of your return and may delay your refund.  Health Care Law Considerations.
  • Special Marketplace Enrollment Period.  If you lose health insurance coverage due to divorce, you are still required to have coverage for every month of the year for yourself and the dependents you can claim on your tax return. You may enroll in health coverage through the Health Insurance Marketplace during a Special Enrollment Period, if you lose coverage due to a divorce.

In addition to the above, changes in your health insurance policy or income and family size can impact any advance payments you may be receiving with the premium tax credit. It’s important to fully understand the tax implications that a divorce decree may have on your overall tax picture.

If you have any question, leave them in the comments below!