Henry and Sean had been living together for what seemed like forever to their friends—20 years and counting. They were partners long before Proposition 8, and they watched its saga unfold together. Now that civil marriage is an established right for same-sex couples, Henry and Sean have been discussing whether to take the big leap together.
Sean proposed, and Henry said yes.
Although news of the engagement made their parents ecstatic (“Finally, some grandchildren!” was Sean’s mom’s reaction), some of their friends in the know were quick to point out a hiccup to making this change: the much misunderstood “marriage penalty.”
Under current law, a dual-income couple will likely pay more in taxes compared with two single people—especially if both are medium- to high-income earners. This is what is referred to as the marriage penalty. But it’s not always the case.
The marriage penalty is due to the fact that married income thresholds, while higher than for single incomes, aren’t double the single thresholds. So, a married couple starts to get into a higher tax bracket more quickly.
Congress hasn’t caught up to the reality that most couples need to have two incomes these days to make ends meet not to mention save for retirement, and other goals, like buying a home.
Sean and Henry sat down together and drew up a list (“Call this a trial run for when we set a date and start working on the guest list,” Henry joked).
There are steps Henry and Sean can take to prepare for the marriage penalty.
The key is to plan ahead.
Ways to Prepare for the Marriage Penalty
- Have your tax preparer do a pro-forma (the fancy way of saying an estimate) of how much you would have to pay if you were filing jointly as a married couple (or MFJ, married filing jointly). Or if you and your new spouse normally prepare your own return, work up your own estimate through your tax filing software.
- The Brookings Institute Tax Policy Center's Marriage Bonus and Penalty Tax Calculator may be able to give you a general idea of a quick estimate to get you started.
- Once you have the pro-forma, determine the appropriate level of tax withholdings each of you should be claiming on your paycheck. Get the hard numbers and have a frank discussion.
- If you have irregular income or there will likely be estimated tax payments due throughout the year, due to from self-employment income or portfolio income, you’ll want to spend some time coordinating how to pay estimated income taxes each quarter.
Figure out what your estimated tax payments will be and how you want to allocate them between you.
This won’t necessarily reduce the marriage penalty, but it can help keep the tax burden split up more fairly. And it could avoid a cash flow shortage at tax time.
Planning with your partner means Communicating regularly
Sealing your bond with the legality of marriage can be a profound testament of your commitment to one another; consider following in Sean and Henry's footsteps to ensure the marriage penalty doesn't get in the way by communicating about finances with your partner on a regular basis.
Want more tips to build strong personal financial finesse? Join the Mosaic Financial Fitness Challenge today:
This article was adapted from a 2015 version Steve Branton originally published on NerdWallet.