Should you get married for tax purposes?

Though activist and model Jenny McCarthy has been together with actor Jim Carrey for five years, marriage has not seemed to be in the cards. In 2008, McCarthy announced on The Ellen DeGeneres Show that she did not intend to marry Carrey, saying the couple "didn't need a certificate."

That may be changing. McCarthy recently told Us Magazine that marriage is a possibility. "We say 'never,' but I don't know. Maybe for tax purposes, someday, when we are old."

But wait ... what about the so-called marriage penalty? Isn't getting married for tax reasons a bad idea? Isn't that what we've been told?

It depends on whom you ask. The Tax Code has flip-flopped over the years to make adjustments for a changing demographic and changing priorities. But no one "fix" has fit every situation.

Prior to World War II, the general rule was one income equaled one return. This made sense in traditional one income families where most women opted not to work. During World War II, the increasing numbers of women in the workplace (remember Rosie the Riveter?) resulted in the need for a change. In 1948, Congress adopted a joint tax return. Married couples combined their incomes and received deductions and exemptions worth roughly twice that of single filers. That structure stayed in place for more than 20 years until it was replaced in 1969.

At the end of the 20th century, the attack on the "marriage penalty" increased. Two-income households were more the norm than the exception. However, if both earners were in higher brackets, it was actually more expensive to be married than to be single. In fact, a 1997 study by the Congressional Budget Office found that 42% of all filers paid more in taxes by filing as married than filing as single.

A number of factors came into play. For one, higher marginal rates meant that in many cases, the secondary wage earner was taxed solely at the top bracket. Additionally, "phase outs" and other income restrictions seemed to impact high-income married filers more significantly than high-income single filers; married couples lost deductions and exemptions more quickly.

President Bush made news in 2001 for offering a solution to the then-existing "marriage penalty." The law gradually increased the standard deduction for married taxpayers who filed jointly to an amount equal to twice the standard deduction of persons filing a single return. In that respect, it looked very much like the 1948 structure that allowed two full deductions for married couples regardless of the level of income. But there was one catch: Like much of tax law, this wasn't a permanent fix. The law was scheduled to go into effect in 2005 and was slated for just five years (it was, however, modified in 2003 to start earlier). That means, unless Congress acts, the "marriage penalty" will return in 2011.

So that makes McCarthy's statement all the more bizarre, right? She is a high wage earner contemplating marrying a high wage earner. The return of the marriage penalty in 2011 would likely hurt her income tax situation more than it would help her.

That analysis is exactly where many pundits stop. There is, however, a piece missing: tax is bigger than federal income tax. In addition to state and other tax laws, there is one more significant tax issue: the federal estate tax. In almost every case, from a pure tax perspective (there are, of course, other non-tax issues), it is more beneficial to pass assets to a loved one as a spouse than as an unmarried partner. And while federal income tax rates top out at 35% of income, the federal estate tax tops out at 55% of taxable assets. At those rates, it matters that transfers to citizen spouses are exempt from the federal estate tax (yes, while Carrey may be a native Canadian, he's also a US citizen); transfers to any other person, including a partner, would be taxable.

So what's the answer? Do you get married for tax reasons or not? I've been asked this question a lot over my career. I've run all kinds of numbers. I've compared charts and graphs. I've read all kinds of commentary. And here's what I usually advise: Don't get married for tax reasons. And don't not get married for tax reasons. What Congress gives today, it can take away tomorrow. As a result, making what should be a permanent decision solely on the basis of a shifting Tax Code doesn't make sense.

Folks get married for all kinds of reasons: love, health insurance, impulse, children. The when and if of whether to get married is really between you and your spouse-to-be. It's bad enough that you have to deal with additional family members like in-laws and first cousins: you'd do well to keep Uncle Sam out of it.
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