Why Get Married? The Financial Bonds of Marriage

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We’re entering summer pretty soon and that means wedding season. In the last year it seems like a lot of my friends have gotten married and for me marriage brings to mind all kids of financial implications. Marriage is hopefully a connection made in love, but also a legal and monetary partnership.

The article I always see written about marriage is one that talks about the ways marriage can help your finances and your tax situation but the flip side of the coin doesn’t really get talked about. So let’s explore.

The Good

When you’re married you get to ignore some of the tax rules that apply to single filers which is pretty cool. Being married you have access to joint filing of taxes. Not only is joint filing easier because you don’t have to fiddle with two separate returns but it also qualifies you for certain tax credits that single filers don’t get. When you’re married the maximum income level for deductions also goes up. For example, if you’re claiming the Earned Income Tax Credit you can make $8,000 more and still qualify than if you were single. A lot of the tax benefits of marriage are maximized when one spouse is the sole provider or makes significantly more. Having a spouse who stays home isn’t so bad because in essence they become your tax shelter. Married and filing jointly allows you to be at a higher income level and remain in a lower tax bracket. If you’re married you get to remain in the 15% tax bracket up to $74,900 for 2015.

A Roth IRA retirement account (money is put in after taxes) is only available to people who make less than $132,000 annually but if you’re married you can still have one up to $194,000. Why would they limit the income level for a Roth IRA you ask? Because Roth IRAs allow you to pay taxes on your money early, and in the future when you’ll be at a higher tax bracket you’ll have already paid the taxes. If you’re a college student you seriously should get one. Close this internet window right now and go to Vanguard.com I’ll wait. If you have a traditional IRA (money is put in before tax) and you or your spouse is not covered by some other employer-sponsored retirement plan you can claim a tax deduction on it for the full contribution amount there is no income limit. However, if either of you has a 401k or 403b at work it’ll affect your ability to claim tax deductions on contributions to other retirement accounts.

Another benefit of being married is if one spouse dies, the other spouse can claim their retirement account as if it were their own. The difference here is that if it was an unmarried couple the spouse could still be the death beneficiary but they would be required to start withdrawing money from the account within one year of the person’s death.

Let’s also not forget the beautiful disaster we call healthcare in the U.S. Being married qualifies you for family health benefits. If both you and your spouse can get health insurance through work you may choose to use one health plan and decline from the other employer, depending on the cost.

Finally, we have social security. I know most of us young people are down on social security because we don’t really believe It’ll be around when we’re of age but I would be morally remiss not to at least mention it. There are a number of cool strategies retired spouses use to maximize their social security benefits. If you’re married your spouse can actually claim half of your social security benefit. You can claim social security at age 62 but your benefit will go up by 5% each year until age 70. Past age 70 it’ll still go up but it’s not particularly advantageous to claim past age 70. When both partners reach age 62 one could claim social security then suspend it, allowing the other to claim 50% of their benefit. This provides a stream of income until both spouses reach age 70 and at that time both can claim their full benefit with no reductions. I know this is a little tough to understand but they don’t make it easy for a reason. Sounds like maybe I need to write a post about Social Security. Stay tuned

The Bad

Despite having significant tax benefits, marriage can actually make you pay more taxes. This happens when both spouses happen to make around the same amount. Romeo and Juliet each earn $150,000 annually. If they weren’t married and each filed as single, they would stay in the 28% tax bracket for 2016. But because they’re married their combined earnings are $300,000 which pushes them into the 33% tax bracket. They’ll pay around $3500 more in taxes per year.

There are aspects to marriage that can be seen as either positive or negative depending on what side you’re on. When you get married your spouse is entitled to everything you own, whether they were around to help you earn it or not. Consider the union of a doctor and a nurse. The doctor is bringing in about three times what the nurse is, so she has a lot more to lose than her husband. If she owns a house, he’s entitled to it. If she’s got $200,000 in investments, he’s entitled to it. This may work out great if you have a very trusting relationship but we know all too well that people change, relationship dynamics change, and very occasionally people go batshit crazy. There’s a reason pre-nups exist.

What about a will? If you’re married and there is no will your spouse will receive your assets by default. If there is a will you may decide what children and other family members receive but you can never disinherit a spouse. I think CNBC says it best, just as you can’t tell a judge you won’t split assets 50-50 in a divorce, you can’t decide your spouse is not entitled to your assets upon your death. A spouse can simply waive a will and receive what the state says they’re entitled to.

Depending on what state you live in assets will be divided up differently. In no-fault states like California you can get a divorce for any reason, you do not have to show wrongdoing. It also means that property is divided up pretty much 50-50. This works out great if you married up but not so great if you came into the relationship with a lot of your own money.

The Ugly

This last point has to do with a natural part of being in a marriage and that is shared financial accounts. These accounts may include bank accounts, credit cards with both spouses listed as authorized users, and debt. In the event of a divorce you will both still be responsible to repay your joint debts. If your spouse isn’t as on top of their finances as you are or doesn’t care about their credit they could hurt your credit.

Let’s say you owned a house together and in the divorce they kept the house. Both your names are still on that mortgage and if they come on hard times and miss payments it’ll affect your score. You might even pay the house payments for them to avoid bad marks on your credit, now doesn’t that sound fun?

Additionally, if your former spouse is vindictive they could easily run up debt on a joint credit card to hurt you. Even though they ran up all that debt you are now responsible for it, the same as they are. A divorce can affect your credit for years after the actual divorce. As long as old debts remain open and unresolved you are responsible for them so I implore you to choose wisely when you marry and get your name off debts where you can. When people get married they think they’ll never get divorced but it’s the first thing that should cross your mind when he pops the question. Hmmm…is this someone I’d be ok going through a divorce with? Romantic, I know.

In modern western society we marry for love; marriage is a demonstration of our devotion and commitment to one person.  But historically marriage has been a legally binding contract that allowed families and even countries to form alliances. Marriage exists not to be some ultimate level of love. It exists to allow people to share their wealth, assets, and heirs in a way that is mutually beneficial to the family. I encourage all my readers to go out and get married, have a ball! But remember that you’re in essence signing a contract that says from now on, you are entitled to all my stuff and all my money. So please be careful with it.

 

 

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