When it comes to taxes, is marriage a penalty or a bonus? That's a tough one. If a married couple pays more in income tax when filing jointly than they would've paid as two single people, that's called the marriage penalty. Despite legislation to eradicate the marriage penalty, there are still marriage traps lurking in the tax code. For example, if both spouses work, any income over $139,350 is taxed at a 28 percent rate. If that same couple was still single, they could each earn up to $83,600 (for a total of $167,200) and still remain in the 25 percent tax bracket. That's a pretty wide gap.
But studies show that despite all of the noise about the marriage penalty, more than half of married couples actually pay less in taxes than they would if they were still single [source:Weston]. That's called a marriage bonus. The marriage bonus is largest when one spouse makes a lot more money than the other, but there are other situations -- like estate transfers or selling a home -- in which your marriage status can save you serious bucks on tax day.
Keep reading for our list of the five subtle and sometimes significant ways that marriage spells tax relief.
Largest Standard Deduction
Thank heavens for the standard deduction! In a rare flash of generosity, the Internal Revenue Service (IRS) gives all taxpayers a sizable automatic deduction from their taxable income. For single taxpayers in 2013, the standard deduction is $6,100. But for married couples filing jointly, the deduction is exactly twice as much: $12,200. When you add in the personal and dependent exemptions you have some serious tax savings. The IRS reports than nearly two-thirds of all taxpayers take the standard deduction, and we don't blame them [source: Internal Revenue Service].
The standard deduction used to be one of the greatest causes of the marriage penalty. Before Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001, the standard deduction for married couples was less than twice the amount for singles [source: Tax Policy Center]. While it didn't significantly contribute to the divorce rate, it was widely viewed as unfair. Now married couples can collect their full share of free deductions. Just don't rub it in to your single friends.
Now let's talk about another pleasant side effect of marriage: children.
Married with Children
You don't have to be married to have children, but according to the Census Bureau, married couples make up the vast majority of American households with children. According to 2009 data, although 40 percent of all live births are to unmarried mothers, only 29.5 percent of American households are single-parent households [source: U.S. Census Bureau]. The moral of the stats story is this: You're more likely to have kids if you're married.
And the best part of having kids is that they're tax gold! Every member of your family gets a free personal exemption of $3,900 in 2013, even a newborn infant. Then there's the Child Tax Credit. Deduct another $1,000 for each child, unless you and your spouse make more than $110,000 a year, after which the credit begins to phase out [source: Internal Revenue Service]. If you don't make a lot of money and have three or more kids, you might even qualify for an additional child credit.
For the lowest income earners, the amount of your Earned Income Tax Credit (EITC) increases significantly with each child you have. In 2013, the highest EITC amount ($6,044) is reserved for families with three or more children earning around $13,450 a year [source: Internal Revenue Service].
The next tax benefit of marriage is for folks who are "unlucky" enough to die rich.
First, a caveat. The federal estate tax (a.k.a. the "death tax") only applies to estates valued over $5,250,000 in 2013 [source: Internal Revenue Service]. The tax is levied on the transfer of large and valuable estates to children and other heirs. If you die with assets valued at less than the $5.25 million mark, then the feds don't even make you file an estate tax return.
But if you find yourself in the enviable/unenviable situation of dying with a sizable nest egg, it pays to be married. You can transfer an unlimited amount of assets to your spouse without paying a cent in federal estate tax [source:Weston]. The IRS calls this the marital deduction.
The same is true for the gift tax. While you're living, you can only give away a certain amount of money each year to each member of your family -- $14,000 since 2013. This is the IRS's way of stopping rich uncle Morty from evading estate taxes by giving away all of his cash before he dies. But gifts for spouses are completely exempt from the gift tax. That would explain Aunt Edna's jewelry collection.
For our next item, we'll look at the tax benefits of marriage when it comes to saving for retirement.
Individual Retirement Accounts (IRAs) are good stuff. With an IRA, you can make tax-deductible contributions to a retirement savings account. That means you can put money away in your IRA account -- up to $5,500 a year for most taxpayers -- before taxes. The trick with an IRA is that it's an "individual" retirement account. Under normal circumstances, you can only deduct contributions that you make to your own IRA, not someone else's. But here's where married couples get a break. If you meet certain conditions, you can pay money into your spouse's IRA and deduct up to $11,000 on your joint tax return.
First, let's look at those "conditions." If you and your spouse's total AGI is more than $178,000, you can't deduct the full $11,000. Also, there's the matter of other retirement plans. If both spouses participate in an employer-sponsored retirement plan in addition to your IRAs, then the income phase-out range drops down to $95,000 to $115,000 for 2013 [source: IRS]. The feds figure that if you have a second retirement plan, you don't need so many deductions.
The good news is that there are no income restrictions at all if neither spouse has an employer-sponsored retirement plan. And there's even better news if you or your spouse are 50 years or older. If you're 50 or older on December 31, 2013, you can deduct up to $6,500 a year in IRA contributions or a combined $13,000 per married couple [source IRS]. Consider this the IRS's way of saying "Happy Retirement!"
For our final tax benefit of marriage, we attempt to dodge the bullet of the capital gains tax.
Selling a Home
Buying a home is a usually a smart investment, unless the Internal Revenue Service (IRS) treats it like an investment. If the IRS decides that you bought a property as a short-term investment -- to "flip" it for a profit, in other words -- then it will charge a 20 percent capital gains tax on any profit you make from the sale.
The best way to protect yourself from capital gains tax on the sale of a home is to qualify the home as a long-term investment. The IRS uses two tests to determine if your home qualifies as a long-term investment: time and residency. If you owned the home for at least two out of the past five years, then you pass the time test. Similarly, if you lived in the home as your primary residence for at least two of the past five years, you pass the residency test.
If you're a single person and pass both the time and residency tests, then you're allowed to earn up to $250,000 in profit from the sale of your home -- tax-free. That's a nice chunk of change. But here's the kicker: If you're married, you can make up to $500,000 in profit from the sale of a home without paying a cent in capital gains.
The qualifying rules for married couples are even more lenient than for single homeowners. For a married couple, only one spouse has to own the house for two of the past five years. However both have to live in the house for at least two years [source:TurboTax]. As an added bonus, the IRS even counts the time that a married couple lived in the home before they were married. So if you lived together in a house for a year before you were married, you only have to live there for a year as a married couple to pass the residency test [source: FindLaw].
For lots more information about the marriage bonuses, income taxes and the IRS, explore the links on the next page.
Many Americans don't think about their tax bills until the new year. But there are things you need to do before Dec. 31 if you want to pay less later.
Author's Note: 5 Tax Benefits That Come With Marriage
I love my wife for reasons that I can't fully explain to the IRS. But I also appreciate the fact that the love of my life and the mother of my children is also a heck of a tax break. Since my wife has taken a pause from her career to raise our young children, we're a one-income family. And since the tax rates are significantly lower for married couples, my solo income keeps us in a lower tax bracket than if I was single. And how about those three kids! All of those sleepless nights and dirty diapers almost seem worth it when those personal exemptions and child tax credits kick in. Almost makes me want to move Father's Day to April 15.
- FindLaw. "The Home Sale Tax Exemption" (April 2, 2012) http://realestate.findlaw.com/selling-your-home/the-home-sale-tax-exemption.html
- Internal Revenue Service. "10 Facts About the Child Tax Credit." February 10, 2011 (April 2, 2012) http://www.irs.gov/newsroom/article/0,,id=106182,00.html
- Internal Revenue Service. "About EITC: Ranges" (April 1, 2012) http://www.eitc.irs.gov/central/abouteitc/ranges/
- Internal Revenue Service. "In 2012, Many Tax Benefits Increase Due to Inflation Adjustments." October 20, 2011 (April 1, 2012) http://www.irs.gov/newsroom/article/0,,id=248485,00.html
- Internal Revenue Service. "Publication 950" (April 2, 2012) http://www.irs.gov/publications/p950/ar02.html
- SmartMoney.com. "Spousal IRAs." February 9, 2012 (April 2, 2012) http://www.smartmoney.com/retirement/planning/spousal-iras-7956/
- Tax Policy Center. "Major Enacted Tax Legislation Since 2000" (April 2, 2012) http://www.taxpolicycenter.org/legislation/2000.cfm
- TurboTax. "Getting Married." 2011 (April 1, 2012) http://turbotax.intuit.com/tax-tools/tax-tips/Family/Getting-Married/INF12006.html
- U.S. Census Bureau. "Table 1335: Births to Unmarried Women by Country: 1980 to 2008" and "Table 1337: Single-Parent Households: 1980 to 2009" (April 2, 2012) http://www.census.gov/compendia/statab/2012/tables/12s1337.pdf
- Weston, Liz. MSN Money. "The myth of the marriage penalty." November 17, 2010 (April 2, 2012) http://money.msn.com/family-money/the-myth-of-the-marriage-penalty-weston.aspx