Categories
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.

 

 

 

 

Categories
Income Tax Maine

Maine High Technology Investment Tax Credit

The High Technology Investment Tax Credit is a credit against Maine income tax for the cost (or, if depreciation has been claimed in a different jurisdiction, the remaining basis) of eligible equipment that is placed into service in Maine and used in a “High-technology activity.”  ”High Technology Activities” are defined as  the design, creation, and production of computer software, computer equipment, supporting communications components and other accessories that are directly associated with computer software and computer equipment or the provision of internet access services and advanced telecommunications services.

 

High Technology Equipment

Computer equipment, electronics components and accessories, communications equipment and computer software all qualify for the credit if more than 50% of their use is for a “high technology activity.”  Leased equipment can also qualify.  Normally, the lessee or sublessee (the end-user of the equipment) claims the credit, but they also have the ability to waive the credit and allow the lessor to claim it instead.

If the credit is claimed by a lessee who deduct the lease payments as they make them, then the credit is available for the amount of the lease payments made each year.  If the taxpayer accounts for the property as a capital lease for tax purposes, then the credit is figured as though they had purchased the equipment.  If the lessor claims the credit,  lease payments received in the year that the equipment is placed in service reduce the cost eligible for the credit.  If a sublessor claims the credit, the lease payments they pay are reduced by the lease payments they receive to determine the amount eligible for the credit.

 

How to Claim

To claim the tax credit, the taxpayer must complete the High-Technology Investment Tax Credit Worksheet to calculate the amount of the credit.  This worksheet will help the taxpayer to determine the total tax credit available, and how much of that credit is currently available for use.  The total credit available becomes a modification to increase Maine taxable income and the amount available for the current year becomes a dollar-for-dollar reduction in Maine income tax.

There is no time frame specified in Maine’s tax code for when to claim the credit.  Therefore, a taxpayer who failed to claim the credit on his or her original Maine income tax return has up to three years from the date that they timely-filed their original return to amend it and claim a refund, or up to two years from the date that they paid their tax, which ever is later.  The time frame for claiming a refund on an amended return is discussed in a different blog post, and Maine follows the federal law for those time frames.

 

Limitations on the Credit

The Maine High Technology Investment Tax Credit is subject to certain limitations.  First, it cannot reduce Maine tax liability below zero.  Second, it cannot reduce a taxpayer’s liability to less than the taxpayer’s liability in the preceding year, after accounting for all other tax credits.  Finally, the Maine High Technology Tax Credit cannot reduce Maine tax liability by more than $100,000 in any one year.

Any amount of the tax credit that is available but cannot be claimed due to these limitations can be carried forward for up to five years.

 

Resources

High-Technology Investment Tax Credit Worksheet & Instructions

Maine statute related to the High-Technology Investment Tax Credit

Technology Tax Credit information from the Maine Department of Economic and Commercial Development

photo credit: Axel Schwenke via photopin cc