Here comes the bride…and more taxes and negative financial impacts?! Maybe. As unromantic as this may sound, marriage at its base level is the single most serious business contract you will ever engage in that has both legal and tax implications. There are a lot of major financial changes that occur when you get married, some of them do hurt in the short term, but there are a lot of financial benefits that can outweigh the drawbacks. The reality is, there are a lot of things that can change about your personal finances when you are married and you should know them before signing on the dotted line.
If we are talking about finance, first we have to address wedding costs. A wedding can be a big setback for a couple right off the bat, especially if you don’t have family helping out. The average wedding expense last year was $30,000! This is why it is so important to talk about finances BEFORE getting married (see our earlier blog post about setting your relationship up for financial success). This will be your first major expense as a couple and you should be discussing how you are planning to pay for these expenses to make sure you aren’t getting in debt for your special day.
Here is a brief guide for all the different ways getting married may (or may not) affect your financial situation.
Federal Income Taxes
If you get married on or before December 31st, you will be filing as married filing jointly or married filing separately, even if you were not married most of the year. Since you are combining your incomes, you will likely have a new combined income that will push you into a higher tax bracket than if you were single with one income. However, your effective tax rate (the average rate you pay in taxes) won’t change too drastically, because in the lower tax brackets, the income for each doubles from single to married filing jointly. So for 2023, a marriage penalty only really exists for your federal taxes if you were both high earners in the top two brackets of 35% and 37% as single filers.
If one spouse is making significantly less than the other, then you may even have a reduction in taxes when getting married. For example, if one partner is providing the primary income, making $120k/year, as a single filer they would be in the 24% tax bracket. Once married, they would now be in the 22% tax bracket.
As for state taxes, there are at least 15 states that have tax codes that penalize married couples due to the tax brackets being less than double of the single filers. So if both partners are making close to the same income, they will likely be paying more in taxes. These states include the following: California, Georgia, Maryland, Minnesota, New Mexico, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin.
Other Tax Consequences
A marriage penalty occurs when the brackets or income limitations for single filers do not double when jointly filing as a married couple. Examples of this include the Medicare Surtax which is .9% applied to wages and compensation over $200k for single taxpayers and $250k for married. Since that threshold is not double, there exists a marriage penalty. This penalty will also be present for high-income earners with Net Investment Income and in the tax brackets for long-term capital gains as you can see in this link here. Long-term capital gains tax applies to the money made on the sale of an investment owned for more than a year. The tax brackets of 15% and 20% do not double when going from single to married filers so your capital gains can end up being taxed at a higher rate.
Would it be better to file separately as a married couple?
While filing separately is an option, the IRS strongly recommends most couples file joint tax returns. The majority of the time, it makes more financial sense to file jointly, but there are exceptions.
Married couples filing separately may face a higher tax rate, thus paying more in taxes. In addition to that, there are many tax credits that you won’t qualify for as a separate filer. This can include:
- Earned Income Tax Credit
- American Opportunity and Lifetime Learning Education Tax Credits
- Exclusion or credit for adoption expenses
- Child and Dependent Care Credit
In addition to the loss of tax credits, if you file separately, you are also limited to much smaller (if any) IRA contributions or deductions, lose the ability to deduct student loan interest, and have a $1,500 capital loss deduction limit rather than the full $3,000 for a joint return.
If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and Alaska) the debt that you accrue during your marriage is “community” responsibility, which means that you both are assumed to have the responsibility and obligation to repay the debt, regardless of whose name is on the debt or if you even knew about it. Yikes! Read more here about how this may impact you if you live in a community property state.
In all the other states, common-law rules apply where spouses can have individual and separate debt, bank accounts, loans, etc. However, in the event of a divorce, just because your partner’s name is on the debt, doesn’t mean you may not end up paying for it. It is really important for both spouses to be on the same page when it comes to accruing debt.
Common law v.s. Community rules apply to all assets, not just debt. So keep that in mind as you consider getting married!
Your credit score really isn’t affected by marriage. However, if you take on joint debt like credit cards, loans, or mortgages, both of your credit scores will be impacted. Be cautious of adding your name to debts managed by an irresponsible partner. When you apply for any debt together as a couple (joint credit cards, mortgage, auto loans, etc.) the lender will use the lowest score for your application, not the combined average. We recommend keeping credit cards separately in each of your names and only getting combined debt on bigger purchases like a mortgage or car.
If you are on an income-based repayment plan for your federal student loans, getting married may cause a quick increase in monthly payments depending on your partner’s income. Your payments are generally set to 10%-20% of your income on these types of repayment plans, so if your partner makes quite a bit more than you, make sure you prepare yourselves for the bigger bill. Some couples are tempted to file as Married Filing Separately and choose a repayment plan that won’t include their spouse’s income when setting the payment. However, if you do this, there are consequences to your ability to invest fully in IRA accounts (see the investing section).
Your joined income may also push you out of eligibility to deduct your student loan interest. In 2023 you can deduct up to $2,500 of student loan interest if you make less than $75k as a single filer or $150k as married filing jointly. If you make above this income, the amount you can deduct will phase out entirely at $90k for single filers and $180k for married filing jointly.
And as a side note, NEVER add your spouse or co-sign with your spouse for your student loans EVER. If you ever consolidate or resubmit your payment plans, NEVER provide any data on your spouse to add them as responsible for your debt. If you were to pass away unexpectedly, this debt will “disappear”, but if your spouse’s name ends up on your loans, they will be responsible for paying it.
A married couple’s combined income is likely to qualify for a larger loan and better terms than a single adult filing with the same income. However, income isn’t the only factor that lenders will be examining. Your credit scores will play a big part, and lenders will use the lowest credit score between the two of you on your mortgage application, not the average. Total debt and type of debt will also affect the mortgage you can qualify for.
Access to a partner’s health insurance plan could save hundreds and even thousands of dollars! Once you’re married, you have the choice between both insurance plans provided by each partner’s employer. Check out this article to weigh the pros and cons and help you figure out what’s best for your situation. Whether you join a policy or look for one through the marketplace, you have 60 days after getting married to make that choice until open enrollment comes around again (normally towards the end of the year). If you are both requiring health insurance policies through the marketplace, your combined income could push you out of any eligibility to receive a subsidy via the Affordable Care Act.
Auto and Home Insurance
Combining your insurance and bundling can give you a multi-policy discount and something worth doing quickly after tying the knot, even if it isn’t the most romantic activity, but could save you money for that honeymoon. Not only can you get a bundling discount, but just being married can reduce your premiums. You can get a 4%-12% discount on your car insurance because you are seen by insurance companies as more risk-averse and financially stable. However, a big part of auto insurance is your driving record. If your spouse has a bad driving history, your premiums will probably go up. You can opt for a named-driver exclusion which could help with costs, but if your partner gets in an accident in the vehicle with the exclusion applied, then the cost could be much higher than what you have saved in premiums.
The maximum income for contributions to traditional and Roth IRAs is significantly higher for married couples filing jointly ($218k in 2023) than singles ($153k in 2023). If one spouse doesn’t work and has no earned income, they can become eligible for contribution to these kinds of retirement accounts as long as one person in the marriage has earned income.
Now, if you are looking into filing as Married Filing Separately, you need to know that if your income is over $10,000 you will be excluded from contributing to a Roth IRA and won’t be eligible for a deduction in a Traditional IRA.
Health Savings Account (HSA)
An HSA is an amazing tax-saving vehicle and the contribution limits go up when you get married to $7,750 (2023) from $3,850 (2023) for single filers. The amazing thing about HSA accounts is that you get a tax deduction when you contribute to the account, and you don’t pay taxes when you use the funds for qualifying health-related expenses. This is the best savings vehicle for your retirement years healthcare expenses as it’s tripe tax-free and there is nothing else with such benefits. You have to have a high deductible health insurance plan to qualify for this account, so take advantage if you can qualify!
This one is very important to everyone, especially LGBTQIA+ couples. Being in a legal marriage means regardless if you have a will or not, your spouse can be entitled to your property and assets if you pass away unless a pre-nuptial or post-nuptial agreement is in place. This means that even if you aren’t on the title of the home (for reasons we discussed when dealing with debt above), most states will grant you ownership of the home if your spouse passes away. This is especially important when you have an immediate family that might not approve of your marriage or may try to contest ownership of your assets. If you are not married, then court battles from family could prevent your partner from gaining access to your assets like your home, even if a will is in place.
When you retire, you have the option of receiving either 100% of your own Social Security Benefits or 50% of your partner’s. This is huge if you earned significantly less than your partner because they would get their full benefit AND you would receive an additional amount worth 50% of their social security benefits. In addition to that, in the event that your partner dies, you would be entitled to their full social security benefits under certain conditions.
So, is marriage a good idea then financially?
At the end of the day you shouldn’t be making a decision about getting married based on the financial consequences, but rather on your commitment to doing all things together for life, including your finances. It is important to be aware of these changes that will affect your financial life and discuss your situation with your financial planner so they can guide you through this new adventure.