Thought experiment, could you theoretically start an LLC or something with your spouse, say consulting, both work the same billable hours, netting 200k for the year, then "pay" your spouse 50k and yourself 150k and get a tax benefit?
Since your income and your spouse are getting lumped together Federal income tax purposes, I don't think it would matter how you paid out the income earned by the LLC between the two of you. But yes, I think it'd save you a little in self employment taxes since the spouse with $150k would have maxed out their social security payments and their marginal self employment tax would drop from 15.3% (social security plus medicare) to 2.9% (medicare only) while if each spouse earned $100k they'd each pay the higher self employment tax rate on their entire incomes.
The major tax savings potential of your scenario actually come from the frankly ridiculous amount of 401k contributions possible: $18k per spouse from their salary plus the lower of 20% of income or $35k per spouse* contributed by the company. So in that example, the company could earn $200k, the couple could save 18*2 + (200*.2) = $76k and only owe income tax on $124k for the year, reducing the federal income tax they owe from ~$41k to $~20k (and maybe more in state income taxes!).
*The details: the company can contribute up to 25% of the employee's salary, but those contributions don't count as part of salary for the purposes of the calculation, so this works out to 20% of the total profits the couple's company has available for contribution. The sum of the employee contributions and employer contributions is capped at -- I think -- $53k. 53-18 = 35 left for employer contributions.
I'm curious how this works, because in my experience, the federal tax code is structured to incentivize marriage.
The federal tax code only incentivizes marriage if you have a stay at home or very low earning spouse. We pay thousands more every year because we are married.
Example: If two people earn 170k and aren't married they'll each be in the 28% tax bracket. However, if they get married then they'll have a huge amount of that taxable in the 33% bracket.
I agree with your example, but to clarify for those who are less familiar with this issue: If a married couple has a combined income of less than $151,200* the amount of tax they're paying is equal to what they would have paid if they were unmarried and had exactly equal incomes and less than they would have payed if they were unmarried and had unequal incomes. So if you make less than 3x the national average annual household income, being married is always either beneficial or neutral for you on tax day.
Above $151,200 in total income, the tax you pay as a married couple is both more than, less than, and equal to the amount two unmarried people would pay depending on how unequally the income was split between the two single people.
I'm sorry for the somewhat awkward phrasing in the two paragraphs above. I wanted to make it as clear as possible that how equal or unequal the incomes of the members of a married couple are doesn't effect how much income tax they owe at all, just the amount of income tax they
would have payed if they weren't married.
*Until this point the federal tax brackets for married filing jointly are 2 times the tax brackets for a single person, but the 28% tax bracket kicks in at less than 2x the single bracket, as do the 33, 35, and 39.6 ones.
