Getting Married and Taxes

Getting married can be a lot of work. I should know, as I just recently tied the knot myself. Even though my wonderful wife handled 90% (95%?) of the planning – and even though we wanted to have a “low key” wedding – there’s a ton of planning that goes on any time you’re putting on such a big event.

Thankfully everything went off without a hitch and now I’m back thinking about all the financial repercussions of being married (truthfully I started working on this article during the beginning of the year).

Being married definitely changes how you handle your finances. We’ve already taking advantage of shifting of our income. But what about all the little rule changes that happen when you switch from filing your tax returns as single to married? I’ve tried to round those up here.

When you get married doesn’t matter

The IRS only cares if you are married on December 31st of the calendar year. If you are married on that date, the IRS will consider you married for the entire year. The same is true if you get divorced during the middle of the year. The IRS will consider you single for the entire year. The only exception to this rule is if your spouse dies during the year. In that situation, the IRS will let you file your taxes as married for the entire year.

Effects of marriage on IRAs

1. Backdoor vs Front door Contributions.

In our situation, we got married in July but the IRS will treat us as married for the months of January through June too. Accordingly, it’s important to think back to those months and make sure you’re not running afoul of any of the tax rules (or better still, take proactive measures if you’re planning on getting married).

One example of this is Roth IRA contributions. Previously my wife was under the income limit and could make normal Roth IRA contributions. Now that our income is combined, she’s ineligible and must make Roth IRA contributions through the backdoor. To avoid a huge headache, we stopped her Roth IRA contributions in January of this year. If we hadn’t done so, we’d have to go back and re-characterize any contributions made from January to June since she’s now ineligible to make them.

2. Previous Tax Year Contributions.

Along the same lines, earlier in the year we took advantage of income shifting to make sure her Roth IRA was maxed out for the previous year. This is because of a quirk in the Roth IRA funding deadline that allows you to make a contribution under the previous tax year anytime between January 1st of the current year up until the tax filing deadline.

In other words, let’s say that you failed to make a Roth IRA contribution in 2016. Any contributions made between January 1st, 2017 and April 18, 2017 (the tax filing deadline for 2017) can be counted toward either the 2016 limit or the 2017 limit. This effectively gives you 15 months each year to make a Roth IRA contribution.

For us, once we knew we were getting married, we took advantage of this rule to max out her Roth IRA contribution for 2016. Since my wife filed her taxes as Single in 2016, she was able to make this contribution directly through the front door (albeit with money I moved from my accounts into hers). This was a handy way for us to get an additional $5,500 sheltered and even better that we could do it for the previous tax year. I don’t want to leave any tax-advantaged space behind!

3. Married Spouses Can Fund Each Other’s IRAs.

Although not applicable to us, another benefit of filing your taxes as married is that one spouse can make a contribution to another spouse’s IRA regardless of whether that spouse has any earned income for the year. If your spouse is taking a year off, raising kids or otherwise doesn’t have any earned income, they would typically not be allowed to make an IRA contribution since you must do so with “earned income”. The spousal rules remove this restriction, which means the working spouse can contribute the maximum amount to each spouse’s account.

Standard vs itemized deductions

If you live in a location with high state and local taxes (like New York or California) or if you own your own home, chances are good that you’re itemizing your deductions on Schedule A each year. This is because the standard tax deduction is $6,350 (as of 2017), while your state and local taxes and mortgage interest is likely to be much higher.

Choosing the standard tax deduction or itemizing your deductions is an either/or proposition. If your itemized deductions are higher than $6,350 (or $12,700 filing married), then you’ll go with those. If they’re lower, you take the standard deduction.

The problem with taking the standard deduction is that you don’t get any additional credit for below the line deductions that you would have otherwise been able to claim had you itemized your deductions (e.g. gifts to charity).

Before we got married, I itemized my deductions (thanks to living in NYC) while she took the standard deduction. Now that our tax return is combined, we’ll both be using itemized deductions which mean that anything she could have listed on Schedule A but didn’t (since she was taking the standard deduction) are now fair game.

In other words, all of her charitable contributions which were previously not deductible are now deductible. We’ll take it! In case anyone is wondering, yes – for the past couple of years I’ve made her gift me all donations and then I’ve made them myself. But I still wanted to highlight to difference in case anyone isn’t thinking of it.

Marriage penalty vs marriage bonus

There’s a lot that has been written about a “marriage penalty” when it comes to filing your taxes. Prior to 2001, the standard deduction for single filers was greater than half of the standard deduction for married filers. I looked up the numbers and in 2001 a couple that wasn’t married could each claim $4,550 as a standard deduction if they filed Single but only $7,600 if they filed Married. Thankfully, this has been repealed and now a married couple can claim exactly twice the standard deduction available to a single filer.

However, there is still a “marriage penalty” in the sense that the married tax brackets aren’t exactly twice the amount of the single tax brackets.

You can calculate whether you’ll receive a marriage penalty or a marriage bonus using this calculator, but the calculations are a bit flawed for those of us that itemized our deductions. The calculator will take into consideration those itemized deductions when calculating how much tax you have to pay as a Single filer but then it conveniently forgets to include it and switches you to the standard deduction when calculating your taxes as married.

Suffice to say that whether you receive a penalty or a bonus in large part depends on the discrepancy in the incomes of the spouses. Two spouses earning a similar amount of money are more likely to see a penalty while one working spouse and one stay-at-home spouse are more likely to see a benefit. You can see this visually displayed on a New York Times graphic.

Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He knows that the Bogleheads forum is a great resource for tax questions and is always looking for honest advisors that provide good advice for a fair price.