The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: frugalNYC on June 02, 2016, 07:25:42 AM
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I want to retire early. My spouse (who I'm madly in love with, btw) wants to work forever. I make roughly 70k, his income is around 300k. We keep our money somewhat separate--each contributing a percentage of our incomes into a joint account for expenses like rent and food and internet. We both like this system and it works for us.
Except with the taxes. His high income is bumping me up into a higher tax rate (41%) so that my portion of the tax bill is roughly $12k more for 2015 than if I was single. Ugh.
And now that I've paid off my student loans, I can't decide whether to throw my money into a tax-deferred 401k or an IRA or just set up a post-tax brokerage account. Spouse says I should put it into a Roth since his income is going to keep going up.
If I was single, I could hit my minimum FIRE number in five years when I'm 35 (I don't need a lot). But since I'm married, I won't be able to take advantage of the lower taxes of retirement because my spouse is going to keep earning his high income.
I was joking last night that we should get divorced for the tax money. He's actually open to this.
What do you think?
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Yes.
Nothing is more important than reducing taxes to the absolute minimum. Nothing.
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Well, first, you should actually do some tax returns as single people to see what would actually happen. Also try married filing separate instead of married filing joint. It's possible that your situation is one where that may make sense. They're rare, but they do happen. If MFS fixes things, just go that route.
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There's a lot going on here. Divorce can open up a can of worms (Law of Unexpected Consequences). If he's got a great income and it will be going up even higher, and you don't enjoy working, perhaps he would enjoy having a SAH spouse? What about sitting down and discussing joint goals?
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A divorce in which you take half his money and alimony or he starts to share. Your incomes are so different that you should have joint money as if you divorce him you take half. Perhaps he is open to the amicable divorce because you would not take what you are entitled to under the law and then he can get a newer younger wife. I would never divorce this guy with out getting my half even if he agreed as you have to look out for you.
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What would the downsides be from a financial point of view? Estate taxes when the first of you dies? How would your home be owned? What about if you separated (for real, not on paper) further down the line?
What about other spousal privileges like healthcare decisions, getting access to each other's insurance policies, [not having to testify against each other], survivor's pensions, etc ?
Is your spouse on board with you not working in future, would they be okay with however you'd split your joint expenses if you had no income?
Would you be better off 'divorcing' just before you FIRE so that you can get a bunch of spouse's savings in the 'settlement' to shelter in your new zero tax 'single' existence (I live in a different tax regime, so this may make no sense at all for you).
If all good then crack on.
Oh, also consider: kids, legal, moral, religious aspects of plan.
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You would need to figure out if you would be considered divorced for tax purposes. You would still be living together, which can lead to a requirement that you file jointly.
I think it would be smart to discuss separating your taxes in paper and having your husband pay the majority. As long as he is on board with your FIRE plans, he should be responsive. This would just be easier.
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I'm only getting $2-3K of tax savings when I plug 70K / 300K into tax-caster for 2 singles vs. MFJ. Granted that's only federal.
Is it possible your 12K "tax savings" from divorce might come largely from simply moving some of the taxes from you to your husband, and not all from an actual reduction in taxes paid between you?
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I'm only getting $2-3K of tax savings when I plug 70K / 300K into tax-caster for 2 singles vs. MFJ. Granted that's only federal.
Is it possible your 12K "tax savings" from divorce might come largely from simply moving some of the taxes from you to your husband, and not all from an actual reduction in taxes paid between you?
That is definitely the case in my relationship (280K + 50K earner in NYC). It's largely the lower earner's share that is reduced (not the overall load). That said, if he was happy paying that much before, maybe that's not a problem, just something to note.
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Not an attorney nor do I know what state you are in, but there are a number of benefits to being married.
As the lower earning spouse, the financial ones are even more important to you. Things like property settlements and alimony are set up for married people.
As an aside, once you quit work being married will be a tax advantage to your husband.
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I just did a quick calc and got $2,000 federal tax savings for filing as two singles versus joint. Wouldn't be worth it to me.
What about property ownership, credit, insurance issues, healthcare decisions, children, etc?
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I would be HIGHLY concerned if my spouse was okay with a divorce to save on taxes. What happened to "married, filing singly"?
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What do you think?
I think it is madness.
I realize your financial arrangement works for you, and I respect that. Things that work are good. But I wonder if it works as well as you think it does? Because reading between the lines it seems to be working unbelievably poorly.
Carefully read Playing with Fire UK's excellent post and think about advantages you'd be giving up. And don't forget about things like Social Security survivor's benefits, where you could claim your husband's benefits if he passes before you, instead of your own which presumably would be much lower. Also, you might be covered by your husband's health insurance if you are married, but maybe not if you are divorced. Family rates for things like car insurance are typically cheaper On and on. There are tons of things like that.
But here is where I (humble opinion, of course) think you are making a major mistake. You and your husband have committed to sharing your lives together. By getting married, your fates are now combined, for better or worse. You have committed to sharing the joys, the sorrows, being happy for one another, all the sappy stuff that people say when they talk about marriage. It is sappy, but it is true. You have committed to share the same life arc. That's what marriage is.
Except you haven't really committed to share finances, so you haven't really committed to share the same life arc either. I don't see how you can share common life goals without having some of your financial goals be the same. You have a goal to retire early which is a major, life changing goal. Is your husband supporting your major life changing goal? Is he helping you achieve it? I don't count "willing to get divorced" as support. You and your husband's financial arrangement is hindering you two from sharing you life's goals together. And that is why I said your arrangement seems to be working unbelievably poorly.
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I'm not a huge fan of the "we're in love and committed for life, but we keep separate finances" because ideally you're a single unit until/unless something happens. Certainly that is how the law (disclaimer: not a lawyer) in most places treats assets acquired during the marriage unless there's a prenup specifying otherwise. So at the very least you should make sure that if you do this divorce for tax reasons that you don't end up losing out on your legal claim to the estate. However, you did say you're happy with this arrangement so...
You are being pushed into a much higher tax bracket because of his high earnings. Perhaps you should try doing your taxes in a hypothetical case, as if you were single but don't file them, and then have DH transfer fund your account with the difference between your hypothetical vs. real taxes? It's fair and simpler than messing with your filing status or marriage.
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What do you think?
I think it is madness.
I realize your financial arrangement works for you, and I respect that. Things that work are good. But I wonder if it works as well as you think it does? Because reading between the lines it seems to be working unbelievably poorly.
Carefully read Playing with Fire UK's excellent post and think about advantages you'd be giving up. And don't forget about things like Social Security survivor's benefits, where you could claim your husband's benefits if he passes before you, instead of your own which presumably would be much lower. Also, you might be covered by your husband's health insurance if you are married, but maybe not if you are divorced. Family rates for things like car insurance are typically cheaper On and on. There are tons of things like that.
But here is where I (humble opinion, of course) think you are making a major mistake. You and your husband have committed to sharing your lives together. By getting married, your fates are now combined, for better or worse. You have committed to sharing the joys, the sorrows, being happy for one another, all the sappy stuff that people say when they talk about marriage. It is sappy, but it is true. You have committed to share the same life arc. That's what marriage is.
Except you haven't really committed to share finances, so you haven't really committed to share the same life arc either. I don't see how you can share common life goals without having some of your financial goals be the same. You have a goal to retire early which is a major, life changing goal. Is your husband supporting your major life changing goal? Is he helping you achieve it? I don't count "willing to get divorced" as support. You and your husband's financial arrangement is hindering you two from sharing you life's goals together. And that is why I said your arrangement seems to be working unbelievably poorly.
This is a great post. It was actually something Mr. D and I talked about before we got married. We are both high income earners (now $300+ combined) but for us the benefits of being married (legally and emotionally) far outweighed being unmarried for tax purposes only.
Still I've known a couple who were separated for 10 years because so his ex could retain military health and other benefits (They eventually divorced when one of them wanted to get remarried). I also know of people who have never married their long-term SO because they didn't want to lose alimony or state benefits (not sure where they are now).
To me even attempting this sounds like a moral blackhole, if not legal fraud due to the legal paperwork that has to be signed, sworn, and filed.
I'm not sure what state you are in, but I know several states where you have to prove you lived legally apart for a specific timeframe. Would one of you move out and get your own place? Would it be only for documentation purposes. Meaning you pay rent someplace but never actually occupy it. When I got divorced (16 years ago) I had to swear under oath and before a judge that my ex and I had been living apart for at least 12 consecutive months. What is the laws in your state? Would you be able to swear under oath to something you know is not true?
What surprises me most is the caviller manner in which the two of you are talking about divorce as if it a just a check box to either opt-in or opt-out.
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The biggest other consideration I can think of is that in the case of emergencies you are no longer family. If something happened like a life support situation you're no longer in control of that decision, his family (parents) is.
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I'm not a huge fan of the "we're in love and committed for life, but we keep separate finances" because ideally you're a single unit until/unless something happens. Certainly that is how the law (disclaimer: not a lawyer) in most places treats assets acquired during the marriage unless there's a prenup specifying otherwise. So at the very least you should make sure that if you do this divorce for tax reasons that you don't end up losing out on your legal claim to the estate. However, you did say you're happy with this arrangement so...
You are being pushed into a much higher tax bracket because of his high earnings. Perhaps you should try doing your taxes in a hypothetical case, as if you were single but don't file them, and then have DH transfer fund your account with the difference between your hypothetical vs. real taxes? It's fair and simpler than messing with your filing status or marriage.
Depends on the country ;)
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His high income is bumping me up into a higher tax rate (41%) so that my portion of the tax bill is roughly $12k more for 2015 than if I was single.
I just did a quick calc and got $2,000 federal tax savings for filing as two singles versus joint.
What jwright & dandarc said. Being married isn't costing $12,000 in taxes. It's costing $2,000. However for whatever reason, the way you folks divide up the withholding and/or tax payments has been shifting $10,000 in tax paid from him income to you. So why not just have him transfer $10k or so over to you each year in each April (since he'd have to pay that extra money in taxes anyway if you got divorced for tax purposes), and avoid all the messy legal paperwork and unintended consequences of an actual divorce?
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I'm not a huge fan of the "we're in love and committed for life, but we keep separate finances" because ideally you're a single unit until/unless something happens. Certainly that is how the law (disclaimer: not a lawyer) in most places treats assets acquired during the marriage unless there's a prenup specifying otherwise. So at the very least you should make sure that if you do this divorce for tax reasons that you don't end up losing out on your legal claim to the estate. However, you did say you're happy with this arrangement so...
You are being pushed into a much higher tax bracket because of his high earnings. Perhaps you should try doing your taxes in a hypothetical case, as if you were single but don't file them, and then have DH transfer fund your account with the difference between your hypothetical vs. real taxes? It's fair and simpler than messing with your filing status or marriage.
Depends on the country ;)
Apparently OP is in NYC. In the US marriage and family law is handled at the state level, hence the "most places" qualifier. Most US states are based on common law property and a handful are community property. How the courts divide assets is more nuanced. If she decides to go forward with this plan she should retain her own divorce lawyer to ensure that she gets a fair division of the estate. IMO, the cost of going through divorce will exceed tax benefits for a number of years. I don't think it's worth it.
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As an aside, once you quit work being married will be a tax advantage to your husband.
^^^ This
If you insist on keeping your finances separate, work out a deal where he can pay you now for his future tax savings. Also, you should consider the capital gains/dividend tax issues once you FIRE (ie I believe his income will make YOU pay them filing jointly) in the deal.
Whew, that was close. Another marriage saved by the eternally single man, Classical_Liberal, no need for applause, it's what I do.
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Maybe you can contribute what your tax would be based on you filing single, if you're FIRE'ing with a low income amount it's going to be a tiny number compared to the overall tax bill.
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No I don't think you are crazy. When two people get married many things may be happening however, I don't equate contract law with love and spiritual commitment so I'm not one of those people that gets concerned that two people's love is somehow diminished due to a prenup, never getting married, or divorce.
A lot of people don't realize just how disadvantaged two income couples are when high income comes into the picture. My wife and I jointly are subject to AMT as well as the extra taxes on investment income, not to mention my cant deduct passive losses and other tax unfairness built into the code. If we filed single neither of us would be subject to those things. This past year our extra tax owed was about $10k only because we are married. That is 20% of our annual spending!!!!
We plan to divorce and remarry later in life once we are retired. The single biggest risk is that one of us dies before we remary and we lose the ability to transfer assets to the other spouse tax free. That is a risk I will take to save over $100k dollars once you factor in the investment returns that extra saved money will make us.
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No I don't think you are crazy. When two people get married many things may be happening however, I don't equate contract law with love and spiritual commitment so I'm not one of those people that gets concerned that two people's love is somehow diminished due to a prenup, never getting married, or divorce.
A lot of people don't realize just how disadvantaged two income couples are when high income comes into the picture. My wife and I jointly are subject to AMT as well as the extra taxes on investment income, not to mention my cant deduct passive losses and other tax unfairness built into the code. If we filed single neither of us would be subject to those things. This past year our extra tax owed was about $10k only because we are married. That is 20% of our annual spending!!!!
We plan to divorce and remarry later in life once we are retired. The single biggest risk is that one of us dies before we remary and we lose the ability to transfer assets to the other spouse tax free. That is a risk I will take to save over $100k dollars once you factor in the investment returns that extra saved money will make us.
Why don't you file separately?
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Just ask your spouse to kick in extra $ for taxes. With your incomes it's peanuts.
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I recall giving my word in front of friends and family something to the effect ....... for richer for poorer, in sickness and in health
Sheesh ! Can't even believe this is a consideration.
You are making $370K per year. You have no money problems. Reduce some spending if you want to save a few bucks.
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My wise accountant always says, don't let the tax tail wag the dog. I think this may apply here.
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Yes.
Nothing is more important than reducing taxes to the absolute minimum. Nothing.
ROFL!
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No. Absolutely not. That's making a mockery of your marriage.
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I want to retire early. My spouse (who I'm madly in love with, btw) wants to work forever.
I think the part in bold matters more than everything else said in this topic, btw.
Don't do anything that can screw that up. Compare MFJ VS MFS tax filing. Talk about becoming a stay at home spouse once you can cover your own bills with your assets.
Divorce is plan Z. There are a lot of things to consider before that.
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You have an otherwise fair system that penalizes you at tax time. So why not just fix how much you pay? Take the tax you would owe as a single filer, and you pay that toward taxes. Your husband pays the rest. That avoid making you pay part of your husband''s AMT or other higher tax rates that only apply to him.
I'd caution taking someone's estimate of your taxes. Estimating taxes requires a detailed view of things like possible mortgage, state income tax (a Federal tax deduction), investments, etc. The tax savings really shouldn't amount to that much in your situation, so I'd suggest reworking how you contribute to the tax bill instead.
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No I don't think you are crazy. When two people get married many things may be happening however, I don't equate contract law with love and spiritual commitment so I'm not one of those people that gets concerned that two people's love is somehow diminished due to a prenup, never getting married, or divorce.
Hear hear!
No. Absolutely not. That's making a mockery of your marriage.
I think the idea of inserting government licensing and contract into a marriage is what makes a mockery of it. A will can take care of a few of the concerns raised above, but sadly others(health insurance, etc) are harder to get around.
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No I don't think you are crazy. When two people get married many things may be happening however, I don't equate contract law with love and spiritual commitment so I'm not one of those people that gets concerned that two people's love is somehow diminished due to a prenup, never getting married, or divorce.
Hear hear!
No. Absolutely not. That's making a mockery of your marriage.
I think the idea of inserting government licensing and contract into a marriage is what makes a mockery of it. A will can take care of a few of the concerns raised above, but sadly others(health insurance, etc) are harder to get around.
A will does not ensure fairness if, for example, the breadwinner decides to leave with all the assets and impoverish a stay at home parent. Marriage laws exist for a reason, they allow individuals to create a new family unit and includes a bunch of details around shared ownership and long term responsibilities/commitments. If you don't want to get married then don't, but keep in mind that there are no legal protections involved and the commitment is only as good as each person's word.
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No. Marriage is interconnected with a million different legal and financial situations. Retirement plans, SS benefits, health insurance, parental rights, hospital visitation, end of life decisions, inheritance, etc. Getting divorced just to reduce your tax burden is incredibly shortsighted.
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No. Marriage is interconnected with a million different legal and financial situations. Retirement plans, SS benefits, health insurance, parental rights, hospital visitation, end of life decisions, inheritance, etc. Getting divorced just to reduce your tax burden is incredibly shortsighted.
I agree with this. It's a bad idea.
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No. Marriage is interconnected with a million different legal and financial situations. Retirement plans, SS benefits, health insurance, parental rights, hospital visitation, end of life decisions, inheritance, etc. Getting divorced just to reduce your tax burden is incredibly shortsighted.
This.
After one bad marriage, I was originally very skeptical about getting married again. I was determined to just live together. But thinking about that list (and it is extremely long if you really start listing it out) ... it was a no brainer when the time came.
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No I don't think you are crazy. When two people get married many things may be happening however, I don't equate contract law with love and spiritual commitment so I'm not one of those people that gets concerned that two people's love is somehow diminished due to a prenup, never getting married, or divorce.
Hear hear!
No. Absolutely not. That's making a mockery of your marriage.
I think the idea of inserting government licensing and contract into a marriage is what makes a mockery of it. A will can take care of a few of the concerns raised above, but sadly others(health insurance, etc) are harder to get around.
I don't think government should license marriages either, but I stand by my post.
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I wish we had a flat tax where everyone pays the same percent regardless of income, these weird type of issues would go away. However, I will greatly benefit from the current (broken) system once I FI.
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My wise accountant always says, don't let the tax tail wag the dog. I think this may apply here.
Never heard this, but Im going to use it when I hear people doing stupid stuff to save on taxes....
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My wise accountant always says, don't let the tax tail wag the dog. I think this may apply here.
Never heard this, but Im going to use it when I hear people doing stupid stuff to save on taxes....
Did you know if you buy a house you magically SAVE MONEY ON TAXES!
It's like free money!
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Did OP ever decide?
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No. Marriage is interconnected with a million different legal and financial situations. Retirement plans, SS benefits, health insurance, parental rights, hospital visitation, end of life decisions, inheritance, etc. Getting divorced just to reduce your tax burden is incredibly shortsighted.
Sort of like quiting work 30+ years before "normal" people is incredibly short sighted? Pointing out the many variables that someone like the OP should consider is great advice but automatically calling them short sited isn't. Its not like these variables really total "a million different" situations either. First of all the only folks that would benefit from not marrying in the first place or getting divorced strictly for tax reasons are those where both people in the relationship earn solid incomes. Under that assumption:
Retirement plans - ensuring retirement assets go to your SO is easy. Almost all modern investment accounts, 401k's, etc have a beneficiary option that can be easily filled out online. Yes you do lose tax shielding on the transfer of assets. Something I already pointed out but isn't' a permanent loss either (you can always remarry when one person quits working).
SS benefits - likely not applicable. When two people are both earning good incomes over their life then there is no spousal benefit, your own earnings will pay better.
Health Insurance - maybe, maybe not. When both people are working they both have access to medical insurance most likely subsidised. Now if you have a high deductible plan and you both get a major illness in the same year you could of possibly saved money on not having to max two deductibles but I'd argue even if that happens the tax saving in all the other years of non marriage probably greater than the deductible. All this assumes one employer doesn't offer domestic partner coverage in which case you can still get the coverage benefits without being married.
Parental rights - Aren't an issue when a non married couple is happy living the same life as a "married" couple. If they later decide to separate then the exact same issues married couples face in divorce happens. No impact here.
Hospital visitation, end of life decisions - Its called a health directive. Very easy to establish.
Inheritance - only an issue in an unexpected AND sudden death. If you are young and both working towards FIRE then being divorced for 10 years isn't high odds of causing an inheritance issue. And if the worst does happen, both people were working and not left destitute by paying taxes on the inheritance. Once you are older and odds of death increase you won't be working and can remarry and enjoy the tax free inheritance.
The only things that a couple who isn't married can't duplicate in another way is 1) tax free inheritance from a spouse, 2) tax benefits lol (when they apply) of being married, 3) and SS spousal benefits. Everything else can be planned around. As I noted 1) carries some risk but 2) and 3) are not applicable to a dual income couple where both make median style (or greater) incomes.
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For all the reasons that others have pointed out it is a bad idea.
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No. Marriage is interconnected with a million different legal and financial situations. Retirement plans, SS benefits, health insurance, parental rights, hospital visitation, end of life decisions, inheritance, etc. Getting divorced just to reduce your tax burden is incredibly shortsighted.
Sort of like quiting work 30+ years before "normal" people is incredibly short sighted? Pointing out the many variables that someone like the OP should consider is great advice but automatically calling them short sited isn't. Its not like these variables really total "a million different" situations either. First of all the only folks that would benefit from not marrying in the first place or getting divorced strictly for tax reasons are those where both people in the relationship earn solid incomes. Under that assumption:
Retirement plans - ensuring retirement assets go to your SO is easy. Almost all modern investment accounts, 401k's, etc have a beneficiary option that can be easily filled out online. Yes you do lose tax shielding on the transfer of assets. Something I already pointed out but isn't' a permanent loss either (you can always remarry when one person quits working).
SS benefits - likely not applicable. When two people are both earning good incomes over their life then there is no spousal benefit, your own earnings will pay better.
Health Insurance - maybe, maybe not. When both people are working they both have access to medical insurance most likely subsidised. Now if you have a high deductible plan and you both get a major illness in the same year you could of possibly saved money on not having to max two deductibles but I'd argue even if that happens the tax saving in all the other years of non marriage probably greater than the deductible. All this assumes one employer doesn't offer domestic partner coverage in which case you can still get the coverage benefits without being married.
Parental rights - Aren't an issue when a non married couple is happy living the same life as a "married" couple. If they later decide to separate then the exact same issues married couples face in divorce happens. No impact here.
Hospital visitation, end of life decisions - Its called a health directive. Very easy to establish.
Inheritance - only an issue in an unexpected AND sudden death. If you are young and both working towards FIRE then being divorced for 10 years isn't high odds of causing an inheritance issue. And if the worst does happen, both people were working and not left destitute by paying taxes on the inheritance. Once you are older and odds of death increase you won't be working and can remarry and enjoy the tax free inheritance.
The only things that a couple who isn't married can't duplicate in another way is 1) tax free inheritance from a spouse, 2) tax benefits lol (when they apply) of being married, 3) and SS spousal benefits. Everything else can be planned around. As I noted 1) carries some risk but 2) and 3) are not applicable to a dual income couple where both make median style (or greater) incomes.
Fantastic post! So many good points.
I think I'm saving this list to add to the massive number of other points I shovel out every time XS or I get asked "Why aren't you two married?"
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WE lived together for 5 years before marrying and had most of the paperwork mentioned but it was a lot of work. However, we could not leave our monthly benefit state pension to each other if not married. We did not marry for that reason but it sure is a nice benefit.
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I think Metric Mouse's list also needs some protections going the other direction. For example, there are beneficiary options to direct a retirement account, but you also might want a guaranteed stake in the account. In other words, you want protection that that beneficiary isn't changed away from you without your knowledge.
To my understanding, you generally need a spouse's permission to direct to a primary beneficiary other than your spouse (at least in a community property state.)
I'm using the retirement plan as an example, but I'm pretty sure it applies across the board. (IANAL)
I've also heard quite a few anecdotal horror stories on unmarried parental rights. They may be BS... but I'd be damn sure I knew before I took that option.
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I think Metric Mouse's list also needs some protections going the other direction. For example, there are beneficiary options to direct a retirement account, but you also might want a guaranteed stake in the account. In other words, you want protection that that beneficiary isn't changed away from you without your knowledge.
To my understanding, you generally need a spouse's permission to direct to a primary beneficiary other than your spouse (at least in a community property state.)
I'm using the retirement plan as an example, but I'm pretty sure it applies across the board. (IANAL)
I've also heard quite a few anecdotal horror stories on unmarried parental rights. They may be BS... but I'd be damn sure I knew before I took that option.
Great points. Parental rights would be a big one. And not one easily fixed with paperwork, depending upon the jurisdiction in which you live.
If the person I was dating decided not to leave their retirement money to me, and not tell me about it, I suppose I could live with that though.
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I think Metric Mouse's list also needs some protections going the other direction. For example, there are beneficiary options to direct a retirement account, but you also might want a guaranteed stake in the account. In other words, you want protection that that beneficiary isn't changed away from you without your knowledge.
To my understanding, you generally need a spouse's permission to direct to a primary beneficiary other than your spouse (at least in a community property state.)
I'm using the retirement plan as an example, but I'm pretty sure it applies across the board. (IANAL)
I've also heard quite a few anecdotal horror stories on unmarried parental rights. They may be BS... but I'd be damn sure I knew before I took that option.
Great points. Parental rights would be a big one. And not one easily fixed with paperwork, depending upon the jurisdiction in which you live.
If the person I was dating decided not to leave their retirement money to me, and not tell me about it, I suppose I could live with that though.
Sure. I am more thinking about a stereotypical husband/wife team. Husband works high earning job. Wife (or Notwife, in this case) is a hard working stay at home mom. They split. He takes it all. Marriage has some protections for her. In a community property state, it's half hers whether she "earned" it or not.
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His high income is bumping me up into a higher tax rate (41%) so that my portion of the tax bill is roughly $12k more for 2015 than if I was single.
I just did a quick calc and got $2,000 federal tax savings for filing as two singles versus joint.
What jwright & dandarc said. Being married isn't costing $12,000 in taxes. It's costing $2,000. However for whatever reason, the way you folks divide up the withholding and/or tax payments has been shifting $10,000 in tax paid from him income to you. So why not just have him transfer $10k or so over to you each year in each April (since he'd have to pay that extra money in taxes anyway if you got divorced for tax purposes), and avoid all the messy legal paperwork and unintended consequences of an actual divorce?
Sorry to bump an old thread but I wanted to expand some thoughts on this angle. Op has never replied to this thread but I wanted to give some advice if they do. - Take a look at a tax table (http://www.forbes.com/sites/kellyphillipserb/2015/10/21/irs-announces-2016-tax-rates-standard-deductions-exemption-amounts-and-more/#148ad1e2792e). I'm not certain whether this is the case for Op, but I see time and time again where people think a 41% marginal rate means all the income is taxed at 41%. That's simply untrue. Who's to say your income isn't the part of the income taxed at 10%, and 15%? Even with his high income, the first $75300 of income only pays $10367.50 of taxes. (13.8% and this doesn't even consider a personal exemption or standard deduction. - No reason for me to look at these considering your combined income anyways.) - This is the exact opposite of your approach that your income encounters the most of yours combined tax bill. (Obviously, a glance at the single tax chart shows this is not fair either.) To be fair, a compromise is somewhere in the middle. As others have said run the numbers for the TOTAL TAXES DUE as being Married Vs two singles including all information such as deductions. The $2000 given by the other posters is a very rough estimate since they don't know your exact situation, but I couldn't imagine that the true cost anywhere close to $12,000.*** "Having him pay you" for the tax credit you are causing him is along the right lines, but I would phrase/accomplish this differently. Simply have the correct amount deducted from your pay. I.E. The amount that would be due if you were filing single. (Whatever the true cost between the filing statuses you can negotiate this. If being Married costs the couple $2000 in taxes, then you may each cover $1000 of it, or you may expect him to cover the full $2000) If you are remotely mustacian (It sounds like you are.) , then you don't need to use tax with-holdings as a "Savings Account". For example, if the tax due on $60000 would be $8000 filing single, then you have $8000-$9000 withheld during the year.
***FYI: If your marriage is truly costing you, it is primarily because of his enormous income. The tax chart generally rewards people with drastically different incomes. (Although, marriage penalties can be seen with the Earned Income Credit, Standard Deduction, Minimum tax, and other places)
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With that line of thought complete, perhaps Op or other posters might want to chime in on the following related question(s) or point out a thread where they would better be discussed.
How is the greater earner **** "using" his/her income?" What is your agreement on how this effects you and your spending?
I.e. Many things as a couple end up being inter-related. The high earner buying a new pickup truck, donating to charity, or paying for personal luxuries may not have a strong impact on the partner's spending.
However I have seen personally where a question of how responsibility should be shared for things like living in an expensive house, luxury vacations, dining, or similar activities that both persons are likely going to participate in.
As the low spender who wants these things less, are you still required to pay 50% of them or refuse participation? How could you possibly split this in a fair manner?
**** Sometimes the high earner is also the high spender, however this is not always true.
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I seriously considered this a few years ago....I guess now I'm just used to it.
We make similar incomes and we were being taxed unfairly. I have a child from a former marriage and had twins in college. I couldn't take the education credit, child tax credit nor could I even take my passive rental property loss. I was pissed. That is a significant sum of money.
I am taking the hits for a few years and I am planning to pay very little in taxes once we retire in our early 40's. payback comes then.
I'm also trying to negotiate a future position so I can file self-employed and shelter as much as I possibly can.
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Yes.
Nothing is more important than reducing taxes to the absolute minimum. Nothing.
(https://dl.dropboxusercontent.com/u/9743562/icon_lol.gif)
Loved this.
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bobechs always gives me a chuckle.
But seriously, just file MFS. How is this even a thread? Does it not provide the answer to the ops tax situation, while still retaining all the benefits of marriage, or do I have a serious misunderstanding of what MFS is?
nothing to do with gay marriage, but reminds me of doug stanhope's bit on marriage:
(http://i.imgur.com/N3c70FD.jpg)
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bobechs always gives me a chuckle.
But seriously, just file MFS. How is this even a thread? Does it not provide the answer to the ops tax situation, while still retaining all the benefits of marriage, or do I have a serious misunderstanding of what MFS is?
MFS sucks for OP's situation. Fundamentally, you take the MFJ tax brackets and divide by 2, and there's each persons MFS tax bracket. That is not the same result as two people filing Single - just look at the tax brackets side by side at higher incomes (25% marginal bracket and up). Then you've got a bunch of other little things. MFS and want to contribute to an IRA? Hope you made less than $10K and are happy with your partial deduction.
MFS is rarely the optimal tax-filing option, although once in a while it works out. One spouse with very high medical deductions is a case where MFS sometimes works out better.
So I'd yes, you have a misunderstanding of what MFS is.
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Put another way, if you are married, typically your combined taxes paid will be the same whether you file Joint or Separate (ignoring things like the "no IRA deduction from MFS"), but the tax may be different compared to 2 unmarried people filing single.
Of course, I believe we found above that the bulk of the OP's problem wasn't as much the marriage penalty increasing total taxes as it was a somewhat inequitable split of the taxes between OP and OP's much-higher-income spouse in their split-finances arrangement.
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bobechs always gives me a chuckle.
But seriously, just file MFS. How is this even a thread? Does it not provide the answer to the ops tax situation, while still retaining all the benefits of marriage, or do I have a serious misunderstanding of what MFS is?
MFS sucks for OP's situation. Fundamentally, you take the MFJ tax brackets and divide by 2, and there's each persons MFS tax bracket. That is not the same result as two people filing Single - just look at the tax brackets side by side at higher incomes (25% marginal bracket and up). Then you've got a bunch of other little things. MFS and want to contribute to an IRA? Hope you made less than $10K and are happy with your partial deduction.
MFS is rarely the optimal tax-filing option, although once in a while it works out. One spouse with very high medical deductions is a case where MFS sometimes works out better.
So I'd yes, you have a misunderstanding of what MFS is.
Ah, yes, serious misunderstanding of MFS. I thought it mimicked the single brackets.
(https://media.giphy.com/media/R6bDgXEXCLcIw/giphy.gif)
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Fundamentally, you take the MFJ tax brackets and divide by 2, and there's each persons MFS tax bracket. That is not the same result as two people filing Single - just look at the tax brackets side by side at higher incomes (25% marginal bracket and up). Then you've got a bunch of other little things.
This. When I add the tax losses into the equation, even a frugal wedding suddenly becomes a massive hemorrhage cash.
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I would be HIGHLY concerned if my spouse was okay with a divorce to save on taxes. What happened to "married, filing singly"?
and doesn't the US have "common-law spouse", where you're considered a spouse in the taxman's eyes if you live together for more than 1 year?
<edit> depends on the state
https://en.wikipedia.org/wiki/Common-law_marriage_in_the_United_States
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Very few states still have this and if they do it is something like 10 years of living together, representing yourself as spouses to the community and some other requirements.
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When I did taxes, I occasionally was asked to do a single tax return for both spouses in addition to the married filing jointly return. Some people with really segregated finances would pay each other back for the tax burden they otherwise would not have had as a single person. Usually, a higher earner will benefit from the married status. A lot of tax prep softwares will even let you mark all pieces of income and deductions as belonging to one spouse or the other. Married filing separately almost never works. Divorce almost never works either (at least for this reason).