Yesterday, we posted a short description of the “Marriage Penalty,” which describes how many married couples, particularly dual-earning couples, bear a heavier tax burden than single people. This impacts high-income households the most. Here are a few thoughts on how to lessen the pain of a higher tax bill after getting married:
1) Know what to expect. If you are getting married this year, talk to a tax professional to discuss what works best for your particular situation. At the very least, you can get an estimate of what you will owe at the end of the year. You may find it beneficial to adjust your withholdings and/or make payments throughout the year to make it easier at tax time.
2) Plan for the future. While tax law negatively impacts married people, there are many other provisions that can help you keep more of your money – particularly if you are planning ahead. Now is the time to look at diverting more of your taxable income into retirement funds. Planning for your children’s education can also provide substantial benefits; there are a variety of tax-favored savings vehicles, credits, and deductions that could be useful for you.
3) Buy a house. If you don’t own a home yet, now could be an excellent time to consider becoming a homeowner and benefit by the mortgage interest tax deduction.
4) Get divorced …or stay married! We say “get divorced” with tongue in cheek – though there are couples out there who have taken this radical measure to save on income taxes. On the other hand, aside from the tax issue, staying married can be an excellent financial idea. Statistically, married people are likelier to have higher long-term net wealth (see our previous post). Even if you’re unhappy about that Marriage Penalty, in terms of your overall financial well-being, marriage might very well be quite beneficial for you and your family over the long run.
Bottom line: Getting married can impact your taxes substantially. We recommend that you talk to your financial planning professional so that you know what to expect, and how to prepare.