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Federal Income Tax

Marriage, Income Tax, and Obamacare

Living together for an extended time without marriage is an increasingly popular choice in Maine, but the decision to marry or not to marry can have significant financial consequences.   Marriage in the United States provides a number of economic benefits that couples don’t get when they choose to start and raise families as legally single people living under one roof.  These benefits can include income tax savings, access to additional social security income, and insurance savings.  Younger couples may reap financial aid benefits if attending college, and families who have accumulated some wealth may save money on estate tax or administrative costs.  Without the benefits of a legal marriage, Mainers who choose to co-habitate are likely to grow poorer over time than than their married counterparts, but there are some major exceptions to that rule.  This post will focus on the tax effects of remaining unmarried.

The tax effects of marriage can break either way, but, but they tend to be favorable.  The bottom tax brackets for married couples filing jointly are twice as wide as the brackets for single people.  The limits for most deductions and credits are also twice as high for married taxpayers filing jointly.  If both spouses have the same income, their taxes filing jointly are generally no worse than if they not gotten married, but if one spouse earns much more than the other, being married will usually yield a lower tax.  In extreme cases, the difference might be over ten thousand dollars for a high earner and a homemaker.   However, there are circumstance when the opposite is true.  When there’s a child involved, social security benefits, or another complicating factor, staying single may provide an edge over being married.

When incomes are unequal, marriage provides the greatest benefit.  This is because the higher earning spouse gets to make use of the higher married-filing-jointly  tax brackets and credit phase outs that would otherwise been wasted.  Consider a family whose only income comes from wages, and who earns the median family income for Auburn, Maine of about $41,000.  We’ll keep things simple by also having them take the 2013 standard deduction of $12,200.    Whether this income is earned by one spouse or earned equally by both, the taxpayers would pay a total of $2,261 in tax if filing jointly.  If they were not married and each filed their own returns, the split of the income would matter.  Two single taxpayers, each earning $20,500 would pay $1,133 each – basically half of the married couple’s tax.

Where they start to run into trouble is when they don’t both earn the same income.  If once spouse earns all of the money and the other is a homemaker, the earner faces a tax bill of $4,208.  When everything else about the couple remains the same, the decision not to get legally married costs them about $2,000 in unnecessary federal tax.  

If the couple has a child and the  earner qualifies as a head of household, he or she can use different tax brackets, and the  tax after considering the child tax credit drops to $2004.  If that same couple were married, they would receive both the child tax credit and the earned income credit, which would bring their net tax all the way down to $349.  This means that an unmarried couple with these facts would be giving up $1,650 in tax savings by raising a family and choosing to avoid marriage.

As I mentioned previously, the tax effects of marriage can break either way.  Consider a family with both adults working at a job that pays perhaps a little over $10 per hour, but which doesn’t give quite 40 hours a week.  This family might still earn $41,000, but that amount is now split evenly.  If they are not married, then only one gets to claim the child and file as a head of household.  That taxpayer would have both a refundable child credit and the earned income credit, for a net refund of $3,109 plus any amounts they might previously have had withheld during the year.  Their significant other would still be paying $1,133 as shown in one of the earlier examples above.  This family would have a net tax benefit, not cost, of about $2000, instead of the $350 they would have paid if they were married.  From a pure income tax basis, they would come out ahead, and that’s before factoring in the Affordable Care Act and the related tax credits.

Marriage and Obamacare

The unmarried couple where both adults earn $20,500 and have one child comes out ahead of a married couple when it comes to figuring their net tax or credit, but that’s before considering Obamacare.   If both adults were age 26, they would have an affordable care act premium around $5,792, and a tax credit of about $3,066 to drop the cost of health insurance down to $2,726 for the year.

Here’s what it would look like if they weren’t married.  The adult without the dependent would pay $3,251 for a silver-level plan, get a credit of $2,163 and have a net premium of $1,088.  The adult with the dependent would pay $5,266 for a year of health insurance, but would receive a tax credit of $4,856, bringing the cost down to just $410.  The net cost of insurance for this unmarried couple would be a mere $1,498.  That’s over $1,200 less than than if they were married.

For the couple with a child who both earn about 20,500, the cost of being married, after factoring in Obamacare, would be about $3,200 compared to staying single.

Similarly, the Affordable Care Act would amplify the price of remaining unmarried for the couple with uneven earnings.  Obamacare does not include a tax credit for individuals with no earnings, so there would be no tax credit for the homemaker.  He or she would pay $3,251 for health insurance with no tax credit.   The adult with the earnings and dependent would pay $5,266 for health insurance and have a tax credit to bring that down to $3,471.  Their combined premiums as an unmarried couple with a child would be $6,722.  That’s about $3,000 more than if they were married.  For the unequal earners, the total cost of staying single, including income taxes and lost ACA subsidies would be  around $4,700.  For the example of uneven earners without a child, the total difference would be around $5,000.

Summary

Few people base the decision on whether or not to marry on financial considerations, nor should they.  However, the financial impact of that decision can be significant and should not be overlooked.  The financial impact of choosing to marry or not has been amplified by the Affordable Care Act.  Generally, marriage has better tax and ACA subsidy effects for couples who have uneven incomes, and staying single is sometimes the better financial decision for couples with similar incomes and children.  There are also social security and other considerations, which will be topics for a different post.

This post is meant solely to provide information and is not a substitute for individualized advice, no matter how close any of the examples may be to a reader’s own tax situation.  When you are dealing with a complex tax question, there’s really no substitute for working with a qualified tax professional.  

Resources

These examples were developed using the Kaiser Family Foundation’s affordable care act calculator located at http://kff.org/interactive/subsidy-calculator/.  

The tax calculations were preformed using Drake Tax Software.