It’s the high season for weddings, and the recent marriage of Prince Harry and Meghan Markle has inspired plenty of romance among couples. It’s hard to follow in the footsteps of royalty, but even those of more modest means are finding ways to celebrate their love through a formal ceremony.
Financing a wedding can be a challenge, but couples might find help from a completely unexpected corner: the Internal Revenue Service. In many cases, those considering tying the knot will find that thanks to tax reform efforts late last year, getting married can actually reduce your tax bill considerably — effectively meaning that the IRS is basically paying you to get hitched.
What happened to the marriage penalty?
For a long time, those who were pragmatic enough to consider financial matters seriously as a part of their marriage preparations actually found that the IRS gave them a disincentive to tie the knot. Under previous law, there was often a marriage penalty that two-earner couples with relatively similar earnings had to pay. So if you looked at the tax brackets that apply to single individuals and then compared them to the brackets for joint filers, the resulting taxes when you added the couple’s incomes together and did the required calculations were higher than what you got if you considered their respective incomes separately.
That came about because of the structure of those tax brackets. Under previous law, there was no marriage penalty for those in the old 10% and 15% brackets, because the income amounts for joint filers were exactly twice as big as the amounts for singles. That guaranteed that combining incomes for couples in that general income level wouldn’t result in an increase due solely to the application of the bracket mechanism. However, with the 25% and higher brackets, the joint filing thresholds were less than double the single threshold. That could create situations in which combining similar incomes would push you into a higher tax bracket and result in a larger total tax bill than staying single.
Why things changed in 2018
Tax reform lessened the blow of the marriage penalty still further by treating a wider range of couples the same way that the old tax laws treated lower-income brackets. The lower limit of all tax brackets for joint filers is now exactly double the lower limit for singles, with the exception of where the topmost bracket takes effect. So now, you have to be a top-bracket taxpayer in order to have any potential to pay a marriage penalty.
Meanwhile, far more people will get a marriage bonus. That’s because if the two people in a couple have unequal incomes, combining incomes can let the higher earner get the benefit of the lower earner’s lower tax rate. For example, if two people both earn $150,000 in taxable income, then the total tax bill would be around $60,600 regardless of whether they’re married or single. However, if one earns $250,000 while the other earns $50,000, then that $60,600 amount is actually less than the higher earner’s own single tax bill of $63,200 — even before considering the additional $6,900 that the lower earner would pay as a single filer.
Do you have the rings?
It’s true that there are still a few situations in which there might be marriage penalties. For instance, some limitations on deductions apply on a per-return basis rather than a per-person basis, such as the itemized deduction that people can take for taxes paid to state and local government entities. As singles, each person could take $10,000 of those taxes, for a total of $20,000, compared to just a single $10,000 deduction for a joint return.
For the most part, though, the removal of the marriage penalty and enhancement of the marriage bonus could well be the push that some reluctant couples need to go ahead and get married. Whether it happens in the popular summer months or on the last day of 2018, a wedding could bring substantial tax savings when you file your taxes early next year.
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