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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Drey on September 08, 2014, 08:30:21 AM

Title: Reader Case Study- should I divorce my husband?
Post by: Drey on September 08, 2014, 08:30:21 AM
Hello all,  I am brand new to the forums, so I apologize if this has been asked elsewhere. 

I have been married to a wonderful man for almost 10 years who I plan to spend the rest of my life with.  However, we are getting hit by the marriage penalty.  HARD.   

I am a physician, Income ~$220 K,  He is an engineer  ~$80K

Being married, I bump his entire income into my tax bracket, costing us $20K PER YEAR in extra taxes.   If we divorced, we could be saving that money.  Possibly even more if I could arrange to pay him child support, deducting that from my income, and adding it to his lower tax bracket.   We get health insurance through my work, which also allows "domestic partners" to get health insurance, and could add him as a domestic partner with very little documentation required, so he could stay on my policy if we divorced.   Also, if we divorced after our 10 year anniversary, he is still able to claim my level of social security benefits in the future.

We are just coming off of a big-spending high (mostly travel and restaurants) after finally making good money for a few years after years of medical school and residency   and are starting to get serious about savings.  We own a $230K valued house, with $110 K left in the mortgage (15 year FRM at 2.75%, practically free money).   He bikes to work 3-4 out of 5 days.  I drive, but I work nights at a busy hospital and am not going to bike those times of day alone as a female.  I do live about 5 miles from work though, so the commute isn't bad.  We have 2 cars, both bought used, both paid off.  2001 Subaru outback and a 2007 Honda Odyssey.  I owe about $58,000 in student loans. 

We each max out our 401k plans (17K per year each), and save an additional 15K per year in another account. 

We have lots of other opportunities for cutting spending.  We spend a lot on the kids, I shop too much, we go out to eat too much, and we certainly travel too much for someone who is not yet financially free.   But, we have no TV and no credit card debt or car loans.   I KNOW there's lots we could be doing to cut spending under these categories, and we're working on that too,  but this big glaring $20K per year seems like easy pickings. 

Should I divorce the love of my life in pursuit of financial freedom?   
Title: Re: Reader Case Study- should I divorce my husband?
Post by: theadvicist on September 08, 2014, 09:04:06 AM
It doesn't feel right to me...

Presumably you pay a 'penalty' because there are other ways you benefit from being married - health insurance, sharing household expenses etc?

(I say presumably, because here in the UK you are always taxed as an individual, being married or not makes no difference to your tax liability, so I have no idea if this is true, I'm just wondering WHY you would be taxed more, and only reason I can see is that there are other benefits).

It just sounds like gaming the system. You love him, you want to be with him. It seems somehow cold to throw away your marriage for financial gain. I mean, if you're not bothered by the 'piece of paper' what made you get married in the first place?

Also, there would be big legal implications. When my husband and I got married one of the big things for me was that I was saying, 'Him. If someone has to pull the plug on my life support, I want him to make the decision'. I got to chose my next of kin, instead of it automatically being my parents, and we chose each other.

As for child support, again, I have limited knowledge of how it works in your location, but in the UK if you lived together, that would be enough to mean you couldn't claim it, I think. It's based on circumstances here, rather than precise statuses, since marriage is becoming less popular.

That said, I'm sure someone will come along now and say do whatever you can to minimise your tax.

Really, no-one can answer this question for you.

(Also, how does your husband feel about this prospect?)

Title: Re: Reader Case Study- should I divorce my husband?
Post by: theadvicist on September 08, 2014, 09:04:59 AM
"It doesn't feel right to me... "

I should have said "It wouldn't feel right for me". Didn't mean for my opening line to sound accusatory!
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Timmmy on September 08, 2014, 09:08:19 AM
How are you calculating that? 

Check out http://marriagetaxcalculator.com/

It's ultra simplistic but plugging in just the salary numbers doesn't get anywhere close to 20k. 
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Mister Fancypants on September 08, 2014, 09:09:35 AM
Marriage is more than a financial contract, if you think it is worth getting divorced to save $20k in taxes you should rethink your marriage as a whole...

My wife and I pay the marriage penalty and would never even think if having this conversation.

Not to mention the laws might change and your incomes might change and you may not always have the marriage penalty.

-Mister FancyPants
Title: Re: Reader Case Study- should I divorce my husband?
Post by: nordlead on September 08, 2014, 09:12:20 AM
Assuming you make no pre-tax contributions to anything and have no kids and take the standard deduction.

At 80k for a single person the federal income taxes would be ~13k.
At 220k for a single person the federal income taxes would be ~53k.
300k for a married couple the federal income taxes would be ~68k.

If I just back out the 401k contributions it looks more like this

At 62.5k for a single person the federal income taxes would be ~9k.
At 202.5k for a single person the federal income taxes would be ~47k.
265k for a married couple the federal income taxes would be ~57k.

So, I'm not too sure how you are getting hit up for 20k in taxes. So, without knowing all the details it looks like you might be able to save a couple thousand by getting a divorce. However, I haven't even considered other deductions/credits and their limits based on single vs. married.

This sounds like a really really bad idea to me and I would hope my spouse would never suggest (or even consider) such an idea.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: nordlead on September 08, 2014, 09:17:26 AM
How are you calculating that? 

Check out http://marriagetaxcalculator.com/

It's ultra simplistic but plugging in just the salary numbers doesn't get anywhere close to 20k.

haha, I should have just googled this rather than quickly running the numbers through tax caster :-D
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Drey on September 08, 2014, 09:19:06 AM
Thank you for the replies.  @theadvicist,  Certainly we share household expenses.  I'm not actually interested in Leaving my husband, I love him dearly and trust him completely.  I'm just wondering if the government issued piece of paper needs to go.   

Health insurance could be done even without being married, I did mention this originally. Documents could be created that still give him decision making power (healthcare and financial power of attorney). 

@Timmmy, I'm basing this off of the check I had to write to the government last year ($18K) despite both of us claiming Zero dependents (we actually have 2).  so our withholding is as if we were both single with zero dependents.  I still owed $18K with neglibile dividend income ($480).  That's where I got that number.  Although husband's company just set up his 401K plan this year (it's a startup) so that may benefit us.   

@Fancypants-  I don't want you to think I am anything other than wholeheartedly commited to my husband.  We are having this conversation because of our commitment to shared goals, not in regards to any doubts about each other.


hmmm, all these calculators keep saying the difference is only 2-3K per year, but the last few years I have written minimum 8K up to $18K checks to the government despite maximal withholdings.  Not sure if something is wrong with these calculators, or with my accountant.     
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Louisville on September 08, 2014, 09:20:08 AM
If getting divorced would really save you that much money, well, there's that. You and your partner define your relationship, not the state government.
BUT, and this is a BIG BUT, surely there are other avenues to explore first. Divorce just seems like a baby/bathwater kind of solution. Start by googling "avoid the marriage penalty". Find a really good (probably expensive) tax lawyer. Think long and hard.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Cheddar Stacker on September 08, 2014, 09:23:23 AM
Assuming you make no pre-tax contributions to anything and have no kids and take the standard deduction.

At 80k for a single person the federal income taxes would be ~13k.
At 220k for a single person the federal income taxes would be ~53k.
300k for a married couple the federal income taxes would be ~68k.

If I just back out the 401k contributions it looks more like this

At 62.5k for a single person the federal income taxes would be ~9k.
At 202.5k for a single person the federal income taxes would be ~47k.
265k for a married couple the federal income taxes would be ~57k.

So, I'm not too sure how you are getting hit up for 20k in taxes. So, without knowing all the details it looks like you might be able to save a couple thousand by getting a divorce. However, I haven't even considered other deductions/credits and their limits based on single vs. married.

This sounds like a really really bad idea to me and I would hope my spouse would never suggest (or even consider) such an idea.

+1 to all of this. I did the exact same thing and got the same results. Don't do it.

On the Child Support question, child support is not deductible/taxable. Alimony is, so you'd have to go that route if you did this, but don't do this. Even if it did save you some cash, it wouldn't pass the sniff test when the IRS audits you.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: dandarc on September 08, 2014, 09:24:34 AM
Maybe OP has lots of deductions or something?  Or has not actually run the numbers - the linked calculator comes up with a marriage penalty of less than 2k with standard deductions.

back of the napkin math only takes you so far with taxes - lots and lots (and lots) of particulars can have big time swings on the end results.

Any way, don't get divorced over a couple grand (even if it really were 20K, still wouldn't do it).  FIRE as goal that you both really buy into will more than make up for that, and it is great for building relationships.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: theadvicist on September 08, 2014, 09:25:30 AM
Thank you for the replies.  @theadvicist,  Certainly we share household expenses.  I'm not actually interested in Leaving my husband, I love him dearly and trust him completely.  I'm just wondering if the government issued piece of paper needs to go.   
 

I understood you weren't interested in actually ending the relationship, just dissolving the marriage. So that's why I asked: If you don't think the piece of paper has any value, why did you get married in the first place?

I'm not trying to be obtuse, I'm asking what did you buy into when you did it? Because that's what you'd be giving up.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: eyePod on September 08, 2014, 09:26:04 AM
Wouldn't you have to pay a lawyer a ton to have all the documents drawn up plus court costs?

What about the legal benefits (i.e. medical decisions, etc.) that you gain by being married?
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Drey on September 08, 2014, 09:31:08 AM
@theadvicist,  I was 22 when I got married and fresh out of college.  We pooled our assets and had $6K between the two of us.  He was unemployed and I was starting medical school.  We got down to our last $1500 (and negative student loans) and he finally found work.  We married for all the same reasons anyone marries for.  Ten years later, and repeatedly writing checks to the government, we find that the government paperwork means less to us than our shared goals and each other.  I would get his name happily tattooed in a visible location, but do I still need to write checks to the IRS to prove my love?   
Title: Re: Reader Case Study- should I divorce my husband?
Post by: dandarc on September 08, 2014, 09:35:30 AM
We get the point as to why - just be aware that it appears to some of us (some of whom are actual tax accountants) that your expected savings are off by an order of magnitude, based on information provided.  Make sure your numbers are right before making a decision like this.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: boarder42 on September 08, 2014, 09:37:52 AM
if the savings are that great.  i mean i'd probably do it if i could convince my wife.  Marriage is just a dumb label and if that label is costing you 20k a year.  why not do away with it.  essentially nothing in you life changes except for more money.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Timmmy on September 08, 2014, 09:40:52 AM
 

@Timmmy, I'm basing this off of the check I had to write to the government last year ($18K) despite both of us claiming Zero dependents (we actually have 2).  so our withholding is as if we were both single with zero dependents.  I still owed $18K with neglibile dividend income ($480).  That's where I got that number.  Although husband's company just set up his 401K plan this year (it's a startup) so that may benefit us.   


Withholding has nothing to do with the amount of taxes you pay.  It's just an estimate done when issuing your paycheck.  If you don't want to write a check at the end of the year, ask for additional withholding on your paycheck.  You can specify an amount in addition to the calculated amount.  Also, you can/should make quarterly estimated tax payments. 

Talk to your tax person about your particular situation.  I've done this calculation for clients before.  It's something we check for all high income clients. 
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Timmmy on September 08, 2014, 09:44:11 AM
if the savings are that great.  i mean i'd probably do it if i could convince my wife.  Marriage is just a dumb label and if that label is costing you 20k a year.  why not do away with it.  essentially nothing in you life changes except for more money.

If the savings were that great there would be a whole lot more people getting divorced for this reason.  I've never seen an actual 20k "marriage penalty". 
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Gone Fishing on September 08, 2014, 09:46:02 AM
Does your state require a separation period?  That could kill the whole idea right there.  Are you going to get remarried if, down the road, you would get a marriage subsidy? 
Title: Re: Reader Case Study- should I divorce my husband?
Post by: oldtoyota on September 08, 2014, 09:46:41 AM
Okay, I'll ask. Why are you claiming zero dependents if you really have two?
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Drey on September 08, 2014, 09:47:38 AM
Thank you everyone, truly.   Perhaps I am attributing the entire end of year check to the marriage penalty when in fact I would just owe that anyways.   I did ask for an additional $500 per paycheck last year withholding and ended up not writing a 5-figure check at least.    I will check this out with the accountant.   Perhaps I would not save as much as I think I would.   

To those of you horrified at this conversation, I truly don't mean to treat marriage flippantly.  Husband and I were just talking about ways to save money, and this (semi) jokingly came up, and then turned into a serious discussion.   I thought I'd ask the opinions of the board here. 

I'm claiming zero because if I claimed 2, they would withhold less, assuming I could deduct more, and I'd be writing an even bigger check each April. 
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Cheddar Stacker on September 08, 2014, 09:49:33 AM
Okay, I'll ask. Why are you claiming zero dependents if you really have two?

I think she means on the W-4 which determines your withholdings. On the actual tax return (1040) they would be silly not to claim the dependents.

Re-do the W-4's, that's your problem. As Timmmy suggests, do it with someone who really knows this stuff well. Being married is not your problem.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: dandarc on September 08, 2014, 09:52:26 AM
Just read that thing Timmy was responding to - OP, you fucked up your W-4s, that is why you owed 18K last year.  Did you just get out of residency last year, or has this happened for a few years running?  Married with 0 dependents is not correct W-4 for your situation.  Back when you were a resident and he was unemployed, it probably worked well enough.  A reasonable safe harbor to avoid owing come April 15 would be for both of you to file single W-4s with 0 dependents.  That's assuming you don't want to do the worksheet to figure out the correct way to get your withholding right.  You probably need to do that, and have additional withheld for the remainder of this year (or send in some estimated taxes). 

If you're getting a big refund, or owe a ton, you're doing something wrong unless you had a big change in taxable income mid-year.  Ideally you'd have a small refund / owed amount - that means you sent in close to  the correct amount of taxes.

Take a look at whitecoatinvestor.com - it is a personal finance blog for doctors - perfect for your situation.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Proud Foot on September 08, 2014, 09:59:20 AM
Drey,

It seems to me like you are serious about your commitment to your marriage. Have you looked at filing your taxes Married filing separately? To me this seems like it would accomplish what you are wanting to in relation to taxes without having to go through the divorce process.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: rujancified on September 08, 2014, 10:04:11 AM
I got married at the end of 2012 and we've filed joint since then. We both make roughly the same amount of very good income. In both years, he claimed 0 and I claimed 1. We got money back for 2012 and owed roughly that same amount for 2013, about a 11k swing.

That's when I learned all about withholding calculators and how the gubmint calculates what's taken out. I am not a tax expert, but what it sounded like to me was that they assume that a married person's paycheck is the only paycheck. So they're taking out enough from my check that, were I the only earner, we'd be close to zeroed out. So each of our paychecks jumped higher when we changed to "married" status (end of 2012) and then we had to render unto Caesar in April in a lump sum.

I used the irs.gov withholding calculator to figure out how much additional needed to come out. Super robust and confusing, so I had my accountant* check my math. We should be okay for 2014 (small payment or return). Not fundamentally different than writing a check in April, but it upsets me less.

Anyway, you could absolutely get divorced and set up all the legal rights with an attorney. If it's fiscally sound to do so, of course. You'd probably outlay a bunch of cash initially to get the documentation airtight, but not sure if it's worth it long run.

*Yeah, yeah, yeah, I should do my own taxes. Rental depreciation messed me up and I'm still a little gun-shy about it.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Cheddar Stacker on September 08, 2014, 10:04:25 AM
Drey,

It seems to me like you are serious about your commitment to your marriage. Have you looked at filing your taxes Married filing separately? To me this seems like it would accomplish what you are wanting to in relation to taxes without having to go through the divorce process.

No, don't do that. Married filing separately has enormous negative consequences. Things like not being able to deduct student loan interest, having to carefully plan out itemized or standard deductions, not being able to contribute to certain retirement investments, and others. It will not help this situation. 98% of the time MFJ > MFS.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: bogart on September 08, 2014, 10:05:00 AM
As others have said, you should run the (real) numbers.  I have no idea how it affects the tax situation, but bear in mind that only one of you would be able to claim your dependents as such, were you divorced.  Also, don't forget to run the numbers for your state taxes.  Being divorced may also affect things like whether you can legally be listed as co-owning things (cars, houses) and ditto for insuring them (or what it costs to do so and how complicated it is).  And there may be other (small?) effects -- as one example of a small one, I know that when my DH and I traveled this summer we were able to share a single rental car and both drive it, with no additional cost, but my mom had to pay $10/day to be listed as a second driver when travelling with a friend.

Quote
We get health insurance through my work, which also allows "domestic partners" to get health insurance, and could add him as a domestic partner with very little documentation required, so he could stay on my policy if we divorced.

Unless I'm mistaken, for other than a married couple, if one's insured as the partner to the other the value of that insurance becomes taxable.

All stuff to figure, as you do the math.

Personally I wouldn't do it just on principle, but that's me ...
Title: Re: Reader Case Study- should I divorce my husband?
Post by: dandarc on September 08, 2014, 10:07:07 AM
Drey,

It seems to me like you are serious about your commitment to your marriage. Have you looked at filing your taxes Married filing separately? To me this seems like it would accomplish what you are wanting to in relation to taxes without having to go through the divorce process.

I doubt this would actually result in lower taxes - sometimes it does, but it is rare that separately works out better than jointly.  The issue here is not that "we owe 20K more than we would if single".  It is "we had too little withheld and had to send in a check for 20K with my taxes".
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Proud Foot on September 08, 2014, 10:20:02 AM
Cheddar Stacker and dandarc,

It appears I know next to nothing about Married Filing Separately. I must admit I do not like how taxes are prepared at all and only keep up on enough to be able to file my own. 
Title: Re: Reader Case Study- should I divorce my husband?
Post by: dandarc on September 08, 2014, 10:24:33 AM
One other thing Drey - you mentioned that you have an accountant.  Did your accountant tell you you were getting hit by the marriage penalty to the tune of 20K / year?  Because if s/he did, this is a sign you need a new accountant.  Enough people here thought "20K marriage penalty on 220 / 80 income doesn't seem right" to go and find out it actually isn't right - your accountant who you are paying to know these kinds of things should have had a similar reaction to this question.

Quick primer on the marriage penalty - it gets worse the higher your incomes are, and the more equal they are - to get to 20K in marriage penalty, you'd need to each be making something like 300K per year - maybe you'll get there someday, but you're not there today.

Read WCI's (whitecoatinvestor.com (http://whitecoatinvestor.com)) recent article about Shaq.  It does a good job of explaining why you need to have a reasonable understanding of personal finance.  You can still work with advisors / accountants, but you need to understand these things well enough just to be able to know if you're getting reasonable advice or not.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: dandarc on September 08, 2014, 10:33:52 AM
Cheddar Stacker and dandarc,

It appears I know next to nothing about Married Filing Separately. I must admit I do not like how taxes are prepared at all and only keep up on enough to be able to file my own.
Take Cheddar's advice - just don't do it.  You are married - you must file either jointly or separately.  It is exceedingly rare that filing separately is better than jointly, and there are big downsides.

My in-law's file separately, but they are doing it because he has a tax problem from the '90s that is still haunting him to this day.  He was building houses, and making a lot of money, but took on too much risk and got caught having spent money he should have sent to the IRS right when there was a bit of a housing bust that put his house-building operation out of business. Makes sense for them to file separately now, however, had they been better with their finances 20+ years ago, and had gotten better advice, they would not be in this situation at all.  Seriously, their accountant (lawyer? someone the trusted) advised them to basically try and wait out the IRS for 10 years - IRS comes calling 9.5 years later, and this has now escalated to possible fraud due to just ignoring the problem they knew about for so long, that none of the usual limitations apply, and this guy is 66, not making all that much, and having his wages garnished by the IRS - this is not where you want to be in a few decades.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Drey on September 08, 2014, 10:45:41 AM
It appears my math is wonky. accountant told me what was owed, and I didn't ask to see the breakdown. Will do in the future.  So, the penalty is less, but if I was spending "only a couple thousand" each year on manicures, I'd be in for some face punching.  I'd say the question stands, just with a lower price tag.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: dandarc on September 08, 2014, 11:00:26 AM
It appears my math is wonky. accountant told me what was owed, and I didn't ask to see the breakdown. Will do in the future.  So, the penalty is less, but if I was spending "only a couple thousand" each year on manicures, I'd be in for some face punching.  I'd say the question stands, just with a lower price tag.
Yeah definitely.  Just keep in mind things change - if your incomes change in a couple years, and now it would be better to file jointly, are you going to remarry?  If you are divorcing / remarrying the same person and both living under the same house, that would make a reasonable person (auditor) question the legitimacy of both the divorces and the marriages.  Then you have to decide on the non-financial benefits of being married and how much they are worth.  Relationship is rock-solid right now, but what if something awful happens (say one of your kids get hooked on drugs, or something worse happens?)  These types of things do happen and do rip marriages apart - is the risk of not having your marriage be legal down the road worth the cost?

Important that you are clear on the cost - 2K is a lot, but not nearly as much as 20K, so you can make an informed decision.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Cheddar Stacker on September 08, 2014, 11:02:12 AM
Are you saying we should punch people in the face for spending too much on taxes? If so, I try to do that regularly by pointing out the benefits of 401ks and Traditional IRA's rather than paying down debts or putting money into Roth IRA's.

I would not punch someone in the face for filing a joint tax return, or getting married for that matter. However, from a mustachian point of view if we are constantly thinking about optimization, maybe people should be considering the financial consequences of getting married before they do so? Maybe.

There are many benefits to having a partner, but you don't need that piece of paper to validate your feelings.

I would not advise getting a divorce strictly for tax reasons unless there were some serious savings and there was legal counsel advising on those potential consequences. I have professional advised clients to get married in order to save on taxes though. I didn't make them do it, and I told them don't do it if you otherwise wouldn't have, but I've specifically told people you will save $x in you marry your partner. Many times you're better off being married than single for tax purposes, but it's certainly not one size fits all. As an example, if your husband ever stopped working and you lived solely on your high income, you would benefit by a very, very wide margin being married.

So if you're still asking the question, for what it's worth I'd say my answer is still no. And based on only the details you gave us, I don't think it's costing you a couple thousand, I think it's costing you a couple hundred.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Roland of Gilead on September 08, 2014, 11:02:23 AM
I could probably work out a scenario where the penalty was close to 10K or so.

If the lower income spouse was going to school while working they would be able to deduct tuition if they were single but would be unable to deduct tuition when married to the high income earner.   That could be a few thousand right there.

If the higher income earner put the couple over the Obamacare robin hood extra taxes threshold, that could cause some serious pain.

The limit for an extra 0.9% Medicare tax for income exceeding $250,000 for a married couple and $200,000 for single (why is it not $400,000 for the married couple?) is a small one but the 3.8% extra tax on investment income could be pretty big if the couple had a lot of investments.   3.8% of $50,000 in capital gains/dividends is $1900.   If they each had $50,000 in capital gains and dividends and were single, the lower earner may not have to pay $1900 but if they are married they will owe $3800 on the combined investments.

Still, it is hard to get to $20K without some seriously wopsided wage earnings and seriously big investments.

I would do the divorce thing for 20K.   The paper is just something between you and the government, marriage is between you and your spouse.  F the government.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: dandarc on September 08, 2014, 11:12:23 AM
(why is it not $400,000 for the married couple?)
'cause this is 'murica and an unnecessarily complex tax-code is our way of life.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Cheddar Stacker on September 08, 2014, 11:18:13 AM
(why is it not $400,000 for the married couple?)
'cause this is 'murica and an unnecessarily complex tax-code is our way of life.

First, there is no logic in the tax code. Your mind will explode trying to look at it that way.

If I had to bet, aside from "let's get more tax revenue", it would be that many (not all) married couples with an income > $250,000 would have only one wage earner anyway so the benefit they gave to that one wage earner was $50K.

Again, hard to find logic there, so I try not to look for it.

Good points though Roland, you can certainly find situations where the marriage penalty could be very large.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: GizmoTX on September 08, 2014, 11:25:13 AM
Some states consider living together as husband & wife to be a common law marriage.

Getting divorced to try to save taxes sends the wrong message to your children about commitment.

Personally, we try to not have a refund -- it means we're lending the IRS money for free. However, writing a huge check means there's been a W4 error or big jump in income, & can expose you to penalties on top of your tax.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Full Beard on September 08, 2014, 11:27:04 AM
Hey Drey,

It's a good discussion to have and I'm glad you and your husband are looking at ways to increase the stache.  Did you not read the, "for richer or for poorer" vows?  You guys have a great income and you'll be able to save a ton of money.  In your original post you said you were both maxing out your 401Ks at 17K each.  I believe the maximum contribution limit for 2014 is $17,500.  That will save you a little bit there.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: sandandsun on September 08, 2014, 11:29:33 AM
As someone who is not yet legally allowed to marry my partner of 10 years, the mother of my two children, I can tell you that I would be happy to pay an extra 20k in taxes every year for that right.  We have MANY other expenses that we would not have if our marriage was legally recognized in our home state (health care, legal costs, etc.).  And we have a high, but disparate income, so we took a hit on taxes this year too (the first year we were required to file jointly for federal taxes, but still as unmarried for state purposes)...
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Anonymous Coward on September 08, 2014, 11:42:05 AM
My wife and I are both high pay physicians.

We have considered this issue it really does cost us 20k per year according to these people.

Once the kid situation is settled we probably will get divorced.

As others have said , you are calculating wrong. Your penalty is much much smaller

http://taxpolicycenter.org/taxfacts/marriagepenaltycalculator.cfm
Title: Re: Reader Case Study- should I divorce my husband?
Post by: .22guy on September 08, 2014, 12:06:45 PM
I can't really chime in on the tax or money saving aspect, but I will toss in my two cents on the marriage and relationship aspect.

I know you said your marriage is rock-solid and I'm sure your husband is a stand-up guy.  But in your situation, I would be worried about breaking that bond.  It might do more to your relationship than you think.  After all, people the world over divorce and cheat on your their spouses when they are legally married.  Lots of people (myself included) thought that my marriage was rock solid and it crumbled unexpectedly.   Just some food for thought.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: MustacheCash on September 08, 2014, 12:18:04 PM
I think the larger question is that if you met your current husband now instead of before you two were making your current salaries, would you two get married then?  If your answer is yes, then the answer is simple that you stay married.  If your answer is no, you can then explore divorce, and the financial ramifications thereof, a little further.  While your answer to this question has less to do with finances and tax implications, so does life in general (and especially marriage).
Title: Re: Reader Case Study- should I divorce my husband?
Post by: tracylayton on September 08, 2014, 12:20:33 PM
What if one of you dies? I believe that would make a difference in the taxes you pay on the estate, but I am not an attorney or accountant.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: FrugalSpendthrift on September 08, 2014, 12:23:37 PM
One way to eliminate the marriage tax penalty is to tell the husband to cut back on work, so that his wages drop below ~$60k.

But in all seriousness, maybe you should revisit the other opportunities for cutting spending, that you hinted at in your first post, since divorce isn't the easy pickings, that you thought it would be.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Timmmy on September 08, 2014, 12:25:00 PM
(why is it not $400,000 for the married couple?)
'cause this is 'murica and an unnecessarily complex tax-code is our way of life.

Anyone who has physically held our tax code in their hands knows the truth in this statement.  The code doesn't even include all the interpretations of the code...
Title: Re: Reader Case Study- should I divorce my husband?
Post by: niatpac on September 08, 2014, 12:27:13 PM
+1 to this as a fellow CPA.

[/quote]

Withholding has nothing to do with the amount of taxes you pay.  It's just an estimate done when issuing your paycheck.  If you don't want to write a check at the end of the year, ask for additional withholding on your paycheck.  You can specify an amount in addition to the calculated amount.  Also, you can/should make quarterly estimated tax payments. 

Talk to your tax person about your particular situation.  I've done this calculation for clients before.  It's something we check for all high income clients.
[/quote]
Title: Re: Reader Case Study- should I divorce my husband?
Post by: okashira on September 08, 2014, 12:30:10 PM
Hello all,  I am brand new to the forums, so I apologize if this has been asked elsewhere. 

I have been married to a wonderful man for almost 10 years who I plan to spend the rest of my life with.  However, we are getting hit by the marriage penalty.  HARD.   

I am a physician, Income ~$220 K,  He is an engineer  ~$80K

Being married, I bump his entire income into my tax bracket, costing us $20K PER YEAR in extra taxes.   If we divorced, we could be saving that money.  Possibly even more if I could arrange to pay him child support, deducting that from my income, and adding it to his lower tax bracket.   We get health insurance through my work, which also allows "domestic partners" to get health insurance, and could add him as a domestic partner with very little documentation required, so he could stay on my policy if we divorced.   Also, if we divorced after our 10 year anniversary, he is still able to claim my level of social security benefits in the future.

We are just coming off of a big-spending high (mostly travel and restaurants) after finally making good money for a few years after years of medical school and residency   and are starting to get serious about savings.  We own a $230K valued house, with $110 K left in the mortgage (15 year FRM at 2.75%, practically free money).   He bikes to work 3-4 out of 5 days.  I drive, but I work nights at a busy hospital and am not going to bike those times of day alone as a female.  I do live about 5 miles from work though, so the commute isn't bad.  We have 2 cars, both bought used, both paid off.  2001 Subaru outback and a 2007 Honda Odyssey.  I owe about $58,000 in student loans. 

We each max out our 401k plans (17K per year each), and save an additional 15K per year in another account. 

We have lots of other opportunities for cutting spending.  We spend a lot on the kids, I shop too much, we go out to eat too much, and we certainly travel too much for someone who is not yet financially free.   But, we have no TV and no credit card debt or car loans.   I KNOW there's lots we could be doing to cut spending under these categories, and we're working on that too,  but this big glaring $20K per year seems like easy pickings. 

Should I divorce the love of my life in pursuit of financial freedom?   

Sounds to me you are looking for a magic pill to solve your problems.
Don't be ridiculous.
On that income, you both could retire in 5 years flat if you really wanted to. Without a "divorce."
Focus on getting $104,000 / year into your 401k's. (e.g. get out off the hospitals payroll, and become independent and max out a solo 401k.)
Cut expenses.

You know, the "hard" stuff.

Title: Re: Reader Case Study- should I divorce my husband?
Post by: gimp on September 08, 2014, 12:42:50 PM
With due respect, this reminds me of the grey line between frugal and cheap. You're so far over the line there's no gray anymore. Divorcing someone but continuing to be with them for tax purposes is one of the cheapest things I've ever heard, and I heard about a guy who washes paper towels.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: starguru on September 08, 2014, 12:49:04 PM
I don't know if anyone mentioned this, but (heaven forfend) something happened to one of you, and you are not married, I don't believe the deceased's assets would pass tax free.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: TrMama on September 08, 2014, 12:50:24 PM
What does your husband think of this plan?
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Rika Non on September 08, 2014, 01:22:35 PM
Drey: 

I for one say it would be worth considering.  Sort of a large step if you are already married, but the marriage penalty is real.  It is one of the large reasons for my long and on-going engagement. Though I think what you would save is a lot less than 20k, I know the penalty for marriage in my case with slightly higher incomes is more like 10-12k / yr.

The one thing you need to think of would be when to re-marry for retirement.  If either of you have pensions or some sort of defined benefit plan, then you would want to be married prior to retirement.  But at your ages, being divorced for 10-15 years on paper ... sure why not?

I for one don't think you are crazy for contemplating this. 
Here’s at least one vote for considering it.

--
Title: Re: Reader Case Study- should I divorce my husband?
Post by: HopetoFIRE on September 08, 2014, 01:30:02 PM
I really would advise against the divorce, IMO.  We are in a similar situation (same field) you are in and understand how painful it is to hand over so much money to the government.  I make about 75% of our combined income and have considered filing separately, but definitely not divorce (ok, I've brought it up jokingly, but would never really do it).  I have a couple reasons why I would not do it.  1) It goes against what we had promised to do when we took our marriage vows.  2) What are we teaching our kids, really?  That it is ok to divorce over a certain amount of money in order to cheat the government?  3) I know that your DH is probably very committed to your relationship, as you are.  However, what if one day, either one of you feels less motivated to work on your relationship since you are already divorced anyway?  You are the one who are likely will be penalized financially since you are a higher earner. 

Are you employed by the hospital or are you with a group?  If with a group, I would look into if your employer would consider a profit sharing/401k plan.  That will allow you to increase your contribution to $52k per year.  I would also see what your withholding is at.  It's odd to me that you would have owed $18k with your salary.  We were at about $450k last year (post profit sharing contribution, withholding at 0 for both, DH with roth 401k) and we only owed 3-4k?  When I got my bonuses, they took out 45% of it though (no additional taxes withheld).  So big ouch there. 

I feel like it is better to keep a marriage intact, at least mine, rather than ending it to find a tax loophole.  At the end of the day, not all decisions should be solely made based on taxes.  It's something my CPA always tells me, but definitely hard to follow since we pay such a huge chunk each year.  Better bet would be to cut frivolous expenses out and try to save more that way. 
Title: Re: Reader Case Study- should I divorce my husband?
Post by: charis on September 08, 2014, 01:31:49 PM
Someone up thread pointed out the problem of an audit.   I don't know the answer, but how could you get divorced and continue to be "married" without raising red flags?  Practically speaking, are you going to be divorced or be married with respect to your children?  Dad and mom are getting divorced, but not really?  (I suspect your children would see this as scam-like).  Not say anything to them and hope they don't catch wind of the divorce?  How about explaining that you would have stayed married if it didn't cost you so much money? Because that's the truth.  It seem very messy. 

If you didn't really want to get married in the first place, but did it because you had to or thought you had too, fine, more power to you.  But if you got married for love and because you wanted to, is the money really enough to change that?

 
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Villanelle on September 08, 2014, 01:51:38 PM
You could save very little.  You'd have to pay for the divorce, which I'm sure costs something even if it isn't contested.  You'd have to pay for the legal documents to set yourselves up with as many of the rights that come with marriage as you can get.  You face complications and higher taxes when one of you passes first. 

Granted, those are one time things, but they still eat away at the already minimal savings.  Presumably, you got married because you want to be married.  For a couple making $300k a year, it seems extremely cheap to give up whatever advantages you once saw in marriage, for a minimal savings.

Also, you have to give some thought to what happens if the relationship does actually end.  You will already be divorced, so custody, alimony, asset division, etc., will already have been settled, in the eyes of the court.  If suddenly your relationship dies and you no longer find those terms favorable, you've ceded a lot of your legal protections. 
Title: Re: Reader Case Study- should I divorce my husband?
Post by: sheepstache on September 08, 2014, 02:45:26 PM
This thread is much less exciting than the subject line led me to believe.

I did know a kid in college whose parents divorced, strictly on paper, to improve the financial aid picture, but I don't know any details.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: SummerLovin on September 08, 2014, 04:24:26 PM
It doesn't hurt to do the math, but, you have to do all the math and some "what if" scenarios to determine if it's worth it. Personally, I wouldn't get divorced just for the savings, and since your financial circumstances could change significantly it probably won't be as big a savings as you think.  You should consider hiring a tax attorney (vs. divorce attorney)  and see what things you can do differently through estate tax planning, that may save you more in the long run. Your accountant (hopefully  CPA) should already be advising you on general tax/financial planning, and maximizing your itemized deductions, but a tax attorney can provide the legal perspective on the matter as well a confidentiality the CPA can't.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: daverobev on September 08, 2014, 04:45:55 PM
Horrible question. Your income is astronomical, you gain so much by living together vs the expense of living alone already. Getting a divorce to save tax is closer to tax evasion than mitigation - IMHO.

I get it. Tax is... not fairly distributed. Nobody 'likes' paying tax, but most people benefit a lot from the society it enables. Pay up.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Beric01 on September 08, 2014, 05:19:33 PM
Horrible question. Your income is astronomical, you gain so much by living together vs the expense of living alone already. Getting a divorce to save tax is closer to tax evasion than mitigation - IMHO.

I get it. Tax is... not fairly distributed. Nobody 'likes' paying tax, but most people benefit a lot from the society it enables. Pay up.

This is a silly argument. People live together all the time without being married, and I would argue many of them are just as committed as a married couple. "Marriage" is just a word that tends to signify commitment to a lot of people.

I have a co-worker who "married" her husband for all intents and purposes, yet in the eyes of the law is still single. Both of them are high-income. They did it for tax purposes. She still tells everyone they're married. Just because you have or don't have the piece of paper means nothing.

I actually think the government should get out of marriage completely, but that's another topic.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: fantabulous on September 08, 2014, 05:27:30 PM
As someone who is not yet legally allowed to marry my partner of 10 years, the mother of my two children, I can tell you that I would be happy to pay an extra 20k in taxes every year for that right.  We have MANY other expenses that we would not have if our marriage was legally recognized in our home state (health care, legal costs, etc.).  And we have a high, but disparate income, so we took a hit on taxes this year too (the first year we were required to file jointly for federal taxes, but still as unmarried for state purposes)...

This was pretty much what I wanted to post, as someone else who can't get legally married for love. Consider all of the legal costs for various documents to provide the same benefits the piece of paper does. Consider the legal costs of figuring out how many documents you'll need in the first place. I have no idea what those numbers might be. That piece of paper isn't just an affirmation of your feelings for your partner, though, as you're already aware.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Beric01 on September 08, 2014, 05:37:10 PM
We're disgusted enough with the state's actions on marriage that we've discussed divorce in the past, and if it ever becomes seriously advantageous for us (I'm envisioning since nightmare scenario involving the AMT), we'd certainly take a look at it more seriously. Our relationship, as understood by ourselves and our community, is irrevocable and will end only with one of our deaths, so state sanction on that account is irrelevant. If legal marriage becomes a net bureaucratic disadvantage, we'll certainly look into doing away with it.

That being said, I don't think you're at that point.

There's just so many benefits right now. For example, as a single person, my unused Social Security benefits will go straight back to the government if I die unexpectedly. For a married person, it flows straight to their spouse. I'm not allowed to designate a beneficiary or anything - it's just another one of those benefits that discriminate against single people.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: chasesfish on September 08, 2014, 05:54:00 PM
Drey - What type of practice do you work in?  Many physicians practices and hospitals have a non-qualified deferred compensation plan.   I have one of these through my work (finance) and it helps high income professionals defer more than the $17,500/year.

The funds are technically an asset of the company, but this is what I commonly see medical and finance professionals use to save more pre-tax.

The other option is to become an independent contractor and be paid through 1099, then use a SEP IRA.  This can be more challenging depending on the malpractice insurance.

The last option is do what we did, my wife is a veterinarian making about the same as your husband.  She just quit work and started her early retirement.  She picks up a shift every now and then for some pocket change, but I've still got 3-5 years left.  We didn't think it was worth her giving away almost 50% of her earnings that we didn't need to the government.   She's been remodeling the house for the last six months.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Drey on September 08, 2014, 07:38:34 PM
I looked a little bit more into our taxes. I think it's costing actually around $6k, because we lose dependent care deductions, etc. It is interesting to me that the amount makes such a difference in people's feelings on the situation, like it would be ok at $20k but not at $2k.  I've also heard of a paper divorce for financial aid and qualifying for Medicaid.

I appreciate comments on how to better position my taxes. As above, I am brand new to the high income category and will discuss this with our CPA. I am currently an employee without the profit sharing option mentioned above. I could possibly be an independent contractor but that makes malpractice way more expensive.

We are looking into having husband scale back. He is applying for his Professional Engineering license and wants to work for himself as a consultant. He is currently at a startup and his stock vests next year, so he's sticking it out until then.

I would also like to cut back my time at work significantly, but we need to save a lot first, which is how I ended up in this corner of the Internet.

Title: Re: Reader Case Study- should I divorce my husband?
Post by: Roland of Gilead on September 08, 2014, 08:37:00 PM
We went through the numbers and our solution to the marriage penalty was for me to quit and take care of the house, do some remodeling, a little side business, most house chores and cooking (I like to cook too).

Essentially when you have one spouse making $250K and the other making $50K, the $50K spouse's income could be viewed as being taxed at 50%.  (SS+medicare = 7%, federal tax = 33%, commuting expenses = 10%)   Who wants to work at a job while being taxed 50% (or more if you pay state tax) and having both people grumpy after a long commute, spending more for ready made dinners or eating out because both are too tired to prepare dinner.

This way we get to make the government bend over, because I get half her SS and contribute nothing to the system.  Stickin it to the man!
Title: Re: Reader Case Study- should I divorce my husband?
Post by: mudgestache on September 08, 2014, 08:40:24 PM
@Roland of Gilead...LOVE the name :)
Title: Re: Reader Case Study- should I divorce my husband?
Post by: MDM on September 08, 2014, 08:45:01 PM
I looked a little bit more into our taxes.
Well done - given the amount of taxes you are paying, it behooves you to understand them well.

General questions: By the way, how much does the CPA cost?  Are you using the CPA to help you legally minimize your taxes, or merely to help you calculate them?  A combination of Quicken and TurboTax (or any other good financial tracking and tax calculation software) is almost certainly less expensive than hiring a CPA merely to "do your taxes."  The cost/benefit of other CPA activities (if any) is for you to evaluate.

Specific issue: When you wrote that $18K check, was any for underpayment interest and penalty?  How much to you expect to pay in April 2015, and will that include any underpayment interest and penalty?
Title: Re: Reader Case Study- should I divorce my husband?
Post by: theadvicist on September 09, 2014, 01:52:42 AM
Not actually sure how divorce works, but wouldn't you have to lie on the paperwork? We have to give a reason - adultery, abandonment, whatever. If you would have to lie to achieve the divorce, surely that's fraud.

I also hadn't thought about what happens in the event of death. The marriage contract is a legal contract and it infers many rights and responsibilities. Look into what each of them are and see if you are happy to do without them, or willing to pay for legal documents to reinstate them eg. visiting rights in hospital, end of life care, inheritance etc.

Finally, I would say (and this in only my opinion), that as you are living in a country that does not allow everyone to marry, it seems a very privileged position to be in to think about throwing all of those many advantages away to save a bit of tax. The law says that when you marry, you gain a lot, so we make you pay a bit more tax. If you don't like it, vote differently. There are aspects of each of our governments policies we don't like. You can't pick and chose which laws you like and only abide by those ones (without facing consequences).

Title: Re: Reader Case Study- should I divorce my husband?
Post by: Thegoblinchief on September 09, 2014, 06:54:30 AM
I thought the title of the thread would make it WAY more interesting.

Far more than optimizing finances, this place is about simplifying your life. What you're thinking of doing adds a ton of extra complexity for 2% of your combined income ($6K of $300K).

Not worth it, even if it is legal/non-fraudulent.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: matchewed on September 09, 2014, 07:58:16 AM
Pretty darn sure that there is 6k worth of optimization outside of the divorce option. Perhaps look into that before entertaining the dissolving of your marriage.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: dandarc on September 09, 2014, 08:15:32 AM
I looked a little bit more into our taxes. I think it's costing actually around $6k, because we lose dependent care deductions, etc. It is interesting to me that the amount makes such a difference in people's feelings on the situation, like it would be ok at $20k but not at $2k.  I've also heard of a paper divorce for financial aid and qualifying for Medicaid.

I appreciate comments on how to better position my taxes. As above, I am brand new to the high income category and will discuss this with our CPA. I am currently an employee without the profit sharing option mentioned above. I could possibly be an independent contractor but that makes malpractice way more expensive.

We are looking into having husband scale back. He is applying for his Professional Engineering license and wants to work for himself as a consultant. He is currently at a startup and his stock vests next year, so he's sticking it out until then.

I would also like to cut back my time at work significantly, but we need to save a lot first, which is how I ended up in this corner of the Internet.
Props on getting a better handle on your situation.  Here, more than most places on the internet, 20K / year is a TON of money - many households here operate on that amount of money for 6-12 months or more.

Cutting taxes helps a lot, but it is more of an "increase the income" thing than a "cut the expenses" thing.  If you can learn to live on say 50K / year, regardless of your income, you can live on that amount per year indefinitely - this has a bigger impact on your ability to retire early than cutting taxes does, because it reduces the amount you need to get to - 25 times 50K is 1.25 million - a very attainable goal, particularly with your income.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Mega on September 09, 2014, 04:55:33 PM
One option not mentioned is you could hire your husband part time and pay him awesome money. This way you could transfer money to a lower bracket. But check with your accountant.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: flyfig on September 09, 2014, 05:15:59 PM
Hi Drey- Had a similar situation and it was not fun. 2013 was year 2 of my marriage and unlike year 1 where I got a nice fat refund, my hubby and I had to write a check to the government.

The most useful thing that happened (after I finished freaking out), was my accountant put together a  line by line comparison between the 2012 and 2013 tax forms to identify what changed. Really helpful to really educate myself on what is really important. Short version was that it was a mix of some new additional taxes (new Medicaid tax, state tax and another tax that I can't remember), I changed my W4 status and with-held less, we donated a lot less to charity and our income changed mid year. It was 2-3 mid sized changes and 3 small changes and I was also surprised how they added up. Based on the analysis, for 2014, we and the CPA came up with a better action plan.

Maybe have a second person check your CPA's work. I'm glad to have gone through the experience since it forced me to learn more about taxes and be more responsible so hopefully no more unpleasant surprises. The divorce sounds way too complicated.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Johnez on September 09, 2014, 06:20:18 PM


Sounds to me you are looking for a magic pill to solve your problems.
Don't be ridiculous.
On that income, you both could retire in 5 years flat if you really wanted to. Without a "divorce."
Focus on getting $104,000 / year into your 401k's. (e.g. get out off the hospitals payroll, and become independent and max out a solo 401k.)
Cut expenses.

You know, the "hard" stuff.

Holy crap, this is a veritable GOLD MINE.  I've not heard much about this.  Coupled with the 401k-Roth pipeline, this is sounds like the fast track to retirement.  Damn, now to figure out how to pull 6 figures on my own!
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Petunia 100 on September 09, 2014, 11:16:42 PM
One option not mentioned is you could hire your husband part time and pay him awesome money. This way you could transfer money to a lower bracket. But check with your accountant.

This makes no sense at all.   Since they file jointly, they are in the same bracket.   Pay her husband for what?   She is not self-employed, so cannot hire him and write it off as a business expense.  Hire him as household help?  What she pays is a personal expense and is not deductible, and what he earns is taxable.  Along with increasing their taxable income, she now owes employer payroll taxes. 
Title: Re: Reader Case Study- should I divorce my husband?
Post by: SnackDog on September 10, 2014, 02:37:13 AM
We are happy to receive the marriage benefit in our taxes, as opposed to the penalty.  Also pay a fortune in taxes but less than people on most countries so not unhappy about US income tax rates.

My issue is liability.  So something as "minor" as maiming a pedestrian with the car could draw a $15 million judgement and wipe us out including all property and savings (except for the paltry exclusions California makes in such cases).  I was thinking of divorcing and in the divorce splitting the savings and property to reduce our legal liability in half.  Before we were married it was difficult to do such an asset transfer; now it's easy. The flip side is, as others have mentioned, the limited legal rights of non-married people in inheritance, medical issues, etc.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Petunia 100 on September 10, 2014, 11:36:41 AM
We are happy to receive the marriage benefit in our taxes, as opposed to the penalty.  Also pay a fortune in taxes but less than people on most countries so not unhappy about US income tax rates.

My issue is liability.  So something as "minor" as maiming a pedestrian with the car could draw a $15 million judgement and wipe us out including all property and savings (except for the paltry exclusions California makes in such cases).  I was thinking of divorcing and in the divorce splitting the savings and property to reduce our legal liability in half.  Before we were married it was difficult to do such an asset transfer; now it's easy. The flip side is, as others have mentioned, the limited legal rights of non-married people in inheritance, medical issues, etc.

Why don't you look into an umbrella insurance policy?   That might set your mind at ease.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: Malloy on September 23, 2014, 12:23:33 PM
I looked a little bit more into our taxes. I think it's costing actually around $6k, because we lose dependent care deductions, etc. It is interesting to me that the amount makes such a difference in people's feelings on the situation, like it would be ok at $20k but not at $2k.  I've also heard of a paper divorce for financial aid and qualifying for Medicaid.

I appreciate comments on how to better position my taxes. As above, I am brand new to the high income category and will discuss this with our CPA. I am currently an employee without the profit sharing option mentioned above. I could possibly be an independent contractor but that makes malpractice way more expensive.

We are looking into having husband scale back. He is applying for his Professional Engineering license and wants to work for himself as a consultant. He is currently at a startup and his stock vests next year, so he's sticking it out until then.

I would also like to cut back my time at work significantly, but we need to save a lot first, which is how I ended up in this corner of the Internet.

Good on you for hearing the advice here and rethinking your initial position.  I think a beloved spouse is worth 6k/year, easy. And, honestly, I'd check your CPAs numbers.  Is your income about 250k?  Because you actually shield some income from taxes by being married and filing jointly.  For example, the 0.9% Medicare tax starts at 250k for joint incomes, but at 200k for individual incomes. That's not much, but make sure you are considering it.  Also, the 33% tax bracket starts at about 180k for singles, but at about 225k for marrieds. That's not to say that there isn't a marriage penalty for certain filers, but there are features of the tax code to smooth it out.  You may want to also ask him about PEP and Pease, which may be where your perception of a penalty is coming from.  PEP and Pease started up again recently, maybe in 2013?, and they tend to have more effect on higher income filers.  I don't think divorce would cure the effects of PEP and Pease changes, because you'd still be on the hook for them with your income level, and I actually think PEP is marriage-independent.  But I'm not sure, because reading about those particular rule changes makes my eyes swim.

Title: Re: Reader Case Study- should I divorce my husband?
Post by: Exflyboy on September 23, 2014, 01:37:53 PM
OK unless your hubby is just out of school he is well underpaid as an engineer

I was paying $85k for an engineer with 3 years experience!

Engineers with 10 to 15 years are worth $100k plus.

Frank
Title: Re: Reader Case Study- should I divorce my husband?
Post by: CommonCents on September 23, 2014, 01:59:16 PM
I looked a little bit more into our taxes. I think it's costing actually around $6k, because we lose dependent care deductions, etc. It is interesting to me that the amount makes such a difference in people's feelings on the situation, like it would be ok at $20k but not at $2k.  I've also heard of a paper divorce for financial aid and qualifying for Medicaid.

No, I'm opposed regardless of $ because I think it skirts/is tax fraud if you remain living together and acting as a married couple.  And no amount of "savings" is worth doing time...  Call up the IRS and ask them if this tactic is legit - I bet the answer is no.  Stick with tax avoidance rather than tax evasion.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: GetItRight on September 23, 2014, 04:37:08 PM
A marriage is no more or less legitimate or valid because you have government permission or acknowledgement of it. Marriage is a personal agreement between individuals (or a religious agreement/institution, if you're so inclined). I'm amazed so many here among a crowd so quick to crucify someone for a $325/yr coffee habit which you actually get something (however ridiculous it may be every day at convenience stores) yet crucify someone for considering a $20k/yr savings while giving up nothing tangible, no change to lifestyle and with only a single instance investment of time to get things changed and set up. Absolutely insane!

If there actually is a $20k/yr savings, year after year, then by all means get divorced. Keep your rings and keep your personal agreement. Have a small ceremony/renewing of vows in your back yard or somewhere nice (but not expensive) with some friends and family if that suits you. Do your research and if divorce means the government steals $20k less from you at gunpoint every year, do it! That money can pay off your student loans and mortgage much quicker then go to investments. It does you and everyone else no good going to the government and arguably does us all harm whereas you saving and spending when you ER benefits you individually as well as the economy as a whole.

That being said, I highly doubt there is a $20k savings. Crunch the numbers for filing married jointly vs married separate vs single individually. I bet the marriage tax in your case is a few grand at most. Still absurd but for me wouldn't be worth the aggravation of the paperwork and planning to get everything in place legally considering taxes laws and income changes over the years and if ER is the goal you will presumably have a much lower taxable income at that point and may receive a marriage subsidy at that point.
Title: Re: Reader Case Study- should I divorce my husband?
Post by: TN_Steve on September 23, 2014, 05:14:52 PM
I looked a little bit more into our taxes. I think it's costing actually around $6k, because we lose dependent care deductions, etc. It is interesting to me that the amount makes such a difference in people's feelings on the situation, like it would be ok at $20k but not at $2k.  I've also heard of a paper divorce for financial aid and qualifying for Medicaid.

....


We've been in your shoes and are again.  Wife is doc making a fair bit more than you, while I'm between you and your DH.  We examined paper divorce back in early 90s when, like now, we faced substantial marriage penalty.  Decided against for a variety of reasons:

*  Sentiment (hokey, but for us it did make a difference)
*  Cost/inefficiency of documentation workarounds to fill the gap vis-a-vis Healthcare and financial PoAs, etc.  [edit:  I am an attorney, and thought too much hassle]
*  Estate Planning (Mentioned by others and HUGE for you in 25 years or less)
*  If lower earner (me) mostly retires to raise kids, you can get marriage benefit during the years of SAHParenting.
*  Asset protection for things held jointly (depends on state), which can be attained otherwise, but for $$--see factor 2.

Bottom line, to us, it wasn't worth it. (But, YMMV!)

Another thought/observation is that you seem concerned with paying taxes each April.  That is a good thing--if you are on top of things and know how much the tab will be (and you meet withholding safeharbors).  My best tax year, due to special factors, resulted in an electronic transfer of more than we'll ever spend on a car to the Feds on April 15.  Of course, that was when the tax-free interest on a municipal bond fund was worth catching; today, it is hardly worth bothering with..... 

Finally, as others have said, you have, or at least can have, opportunities to put far more than 17,500 away each year.  If you are in a small enough practice environment, push to have employer max out on plan contributions, or as you noted in another comment, look into breaking out on your own.  The present 415 limit is $52,000.

Good luck.  :-)



Title: Re: Reader Case Study- should I divorce my husband?
Post by: chops on September 27, 2014, 02:32:18 PM
Great topic!  A lot of very thought provoking ideas here - it looks like the math of it depends on the lower income earner earning a much lower amount, and if you continue earning at a high level, then there is a marriage benefit.  It seems that if the lower income earner is also earning enough to push you over the dreaded $250k barrier it does work against you. 

So, sounds like more fuel for DH to RE, or maybe you both work part time?