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Getting Married and Taxes

Questions from Readers

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Dear Tax Guide,

Can you explain why the income threshold for the child tax credit is $75,000 for a single person but only $110k for a married couple?? Why not $150k for a married couple?

I’ve often noticed that the married amounts for various deductions are quite often substantially less than double the single amount. I’m better off financially being single and cohabitating!

Dear Reader,

Great question! President Bush's tax cuts in the last few years has done a lot to reduce the so-called "Marriage Penalty." For example now the Standard Deduction for married people is twice the standard deduction for single people. But other tax benefits such as the child tax credit have not similarly doubled. There's no explanation for this, except that Congress intentionally provided "Marriage Penalty" relief for some things (standard deduction), but not for others (child tax credit).

That being said, tax planning for high income earners is focused entirely on managing PAGE ONE of the 1040. That's because various tax benefits on page two (standard deduction, itemized deductions, personal exemptions, tax credits, etc.) are either phased out, minimized, or eliminated by various provisions in the tax code. (For example, the limitation on itemized deductions, or eliminating itemized deductions through the Alternative Minimum Tax, and the phaseout for the personal exemption). Thus for high income earners, the only available tax strategies are to shift income from taxable to nontaxable (401k deferrals and tax exempt interest, for example), reducing income (capital losses, business losses, and rental income losses, for example), or shifting income to a lower tax rate (long term capital gains, for example). In fact, these strategies work so well that I recommend them even for people of modest incomes. That is because the more you rely on tax strategies for managing taxable income (on page one), the less you will be effected by the constant congressional tinkering with the deductions and credits on page two.

Now, as for getting married or not, that's almost always a personal decision instead of a tax decision. Strictly from a tax perspective, getting married makes the most sense when one spouse earns income and the other spouse doesn't earn income. That because one income is being spread over two people, and the income is now tax at the more favorable Married Filing Joint tax rates, and the married couple can enjoy higher limitations on retirement savings and other tax benefits. Again, strictly from a tax perspective, staying single makes the most sense when both life-partners earn income. That's because you can use different tax strategies for each partner. For example, the person with the lower income can take advantage of various child-related tax benefits (head of household filing status, child tax credit, earned income credit), while the person with the higher income can take advantage of various income-related tax strategies (as I discussed above).

I would also recommend staying single if one partner has a significant tax debt that he or she is still trying to pay off, has been in tax trouble in the past, or is self-employed and filing a Schedule C. Filing a Schedule C can expose the other partner (if married and filing jointly) to significant tax liabilities in the event of an audit or large balance due at the end of the year. I encourage all my married clients where one files a Schedule C to file separately.

Good luck on your relationship, whether you get married or not.

Cheers,

William

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