Tying the Knot: Tax Benefits and Drawbacks

Many have questions about the financial and tax ramifications of the decision to get married. We discuss the potential benefits and drawbacks to a legal marriage from that perspective.

While there are many religious, cultural, and familial decisions that weigh into the decision of whether to get married, our clients often ask about the financial and tax ramifications of the decision. This article outlines the potential benefits and drawbacks to a legal marriage from that perspective.

Let’s start with the benefits.

There are many advantages to getting married from an income, gift, and estate tax perspective. Following are just a few of the tax benefits that marriage affords.

  • Marriage bonus: If one spouse earns little or no income, the earning spouse may see a reduction in his or her income tax bill after marriage. For income earned in 2023, single taxpayers reach the highest marginal federal income tax rate of 37% on all income earned over $578,125. Married couples, on the other hand, hit that same top rate on collectively earned income above $693,750. A spouse earning $600,000 per year would owe at least $28,000 less in taxes if married than if single.

  • Gain from the sale of a home:  Subject to certain restrictions, Section 121 of the Internal Revenue Code (IRC) excludes up to $250,000 of gain from the sale of a taxpayer’s primary residence. This exclusion doubles to $500,000 for married taxpayers who file jointly.

  • Social Security survivor benefits: A surviving spouse may receive Social Security benefits based on his or her deceased spouse’s earnings record.

  • Retirement account contributions: For 2023, single taxpayers can contribute a maximum of $6,500 of earned income to an IRA or Roth IRA for the calendar year. Each married taxpayer who files jointly may contribute that amount, even if just one spouse earned the income.

  • Retirement account rollovers: Subject to certain limitations, surviving spouses who are the beneficiary of their deceased spouse’s IRA may treat it as his or her own. This may lengthen the tax deferral period by allowing withdrawals over the surviving spouse’s life expectancy.

  • Gift tax: Gratuitous transfers between spouses qualify for the unlimited gift tax marital deduction. In other words, no gift tax is assessed on transfers between spouses. Gratuitous transfers to non-spouses, however, may incur a 40% gift tax to the donor on transfers beyond the applicable exemption amount. In addition, married taxpayers may combine their annual exclusion gifts (up to $34,000 in 2023) and their applicable exemption amounts (up to $25,840,000 in 2023).

  • Estate tax: Bequests made to a surviving spouse qualify for an unlimited estate tax marital deduction. No estate tax is assessed on bequests made to spouses or to special trusts for the benefit of surviving spouses. In addition, subject to certain restrictions, a surviving spouse may effectively “inherit” the deceased spouse’s unused applicable exclusion amount, meaning that a surviving spouse’s applicable exclusion amount could increase to as much as $25,840,000 (in 2023).

There are, of course, many non-tax reasons to consider marriage as well. For example, adopting a child may be easier for those couples who wish to start a family. In addition, legal spouses are allowed hospital visitation rights and access to certain medical information. In many cases, they also can make medical decisions on behalf of their spouse if he or she is incapacitated. Finally, spouses of U.S. citizens and permanent residents who are not citizens themselves may obtain green cards allowing them to live and work in the country.

But don’t forget the drawbacks.

  • Marriage penalty: In contrast to the marriage bonus referenced earlier, if both spouses are high earners, they may face a larger tax bill after marriage. As mentioned, for income earned in 2023, single taxpayers reach the highest marginal federal income tax rate of 37% on all income earned over $578,125. Married couples, on the other hand, hit that same top rate on collectively earned income above $693,750 – well less than double the income of a single taxpayer. Two individuals earning $500,000 per year would pay at least $80,000 more in taxes if married than if single. This difference is often referred to as the “marriage penalty” because it financially penalizes a dual-income marriage from an income tax perspective. Couples cannot escape the marriage penalty by filing their income tax returns separately. The tax liability of a married taxpayer who files separately is not computed using the more favorable rates paid by single taxpayers. In fact, many deductions, exemptions, and credits are not available to those married taxpayers who file separately instead of jointly.1 In addition, marriage may increase the couple’s combined income above the threshold for an additional Medicare tax of 0.9%. Single taxpayers are subject to this additional tax when their income exceeds $200,000. The threshold for married taxpayers is $250,000.

  • Debt and divorce: Marriage might result in spouses being on the hook for each other’s debts and credit history. And while it’s difficult to imagine, the prospect of an expensive, acrimonious breakup shouldn’t be ignored. The rules for what happens to property earned or obtained during marriage differs depending on the state where the couple resides, but divorce can leave one or both ex-spouses bereft of certain prized possessions or property.

  • Retirement accounts: If a couple has been married for more than one year, the federal Employee Retirement Income Security Act of 1974 (ERISA) requires that a spouse be named as the primary beneficiary of the plans governed by ERISA. Many plans extend this requirement to spouses married less than one year. The plans covered by ERISA typically include 401(k)s and pensions plans (but not IRAs or Roth IRAs – although certain states impose an analogous requirement). In addition, during a divorce most states will consider earned income, including income contributed to a retirement account during the marriage, to be marital property subject to equitable division or community property in community property states. Both of these rules – the requirement to name a spouse as primary beneficiary and the treatment of contributions to retirement plans as marital property – may be waived by written consent or agreement.

  • Treatment of trusts: Trusts benefiting spouses or where a spouse is named as a trustee are sometimes treated differently than other trusts under federal income tax rules. For example, trusts that were not previously considered “grantor trusts” may become one as a result of a marriage, which would necessitate a change in income tax reporting from the trust to the grantor, or creator, of the trust. In addition, the federal income tax rules ignore certain valuation discounts in intrafamily transfers of interests in family-controlled entities, but unmarried partners are not considered family members for purposes of this rule. A marriage may affect the gift tax associated with certain transfers that previously were exempt. Individuals who have set up a trust that benefits an unmarried partner or where an unmarried partner is named as a trustee should consult with their attorneys and financial advisors to determine whether a marriage would affect the trust’s tax status.

Marriage is as much a financial decision as it is an emotional one. Any couple considering marriage should consult with their financial advisors and other tax service providers to determine the financial and tax consequences of marriage.

1 Individuals and couples should speak to their accountants to determine how their tax picture will change in the event of marriage. For a rough estimate of how much of a penalty or bonus filing jointly would create, the Tax Policy Center’s online calculator can help: http://www.taxpolicycenter.org/interactive-tools/marriage-bonus-and-penalty-tax-calculator.

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