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SaveWealth does not provide tax advice. To learn how the marriage penalty may affect your family, always consult your tax professional. For more legal information, please click here.


Are Wedding Bells In Your Family's Future?The Sound of Wedding Bells May Make the Tax Man Smile

CARLSAD, CA - The weather's warming up, which means you may have wedding bells in your summer plans.

Weddings are not cheap, by any means. After you factor in the costs of sending invitations, throwing the ceremony, catering the reception and paying for the honeymoon, many couples find that they have spent a small fortune just to get hitched.

Unfortunately, Uncle Sam doesn't make things any easier, causing many married couples to pay higher taxes once they have given their vows.


Penalties for Wedded Bliss

Sound hard to believe? Think again. Uncle Sam's so-called "marriage penalty" impacts over 40% of married couples, boosting annual taxes for these couples. The penalty can be steep, especially for two-income couples where both incomes are fairly equal. When both incomes are combined, many couples are pushed into the next tax bracket, triggering higher taxes on April 15th.

If one spouse makes substantially more than the other, there may be no penalty attached. In fact, modest changes in a married couple's tax rate could earn those couples with only one "breadwinner" a marriage bonus in the form of reduced taxes. However, more and more households are two-income families, meaning the marriage penalty may be taking a larger bite out of disposable income.

Here's how the marriage penalty works:

Married Couple
AGI (Adjusted Gross Income)
Minus exemptions and standard deductions
Taxable income
Federal tax
($17,532 for two individuals)
Marriage penalty
Sources Used: IRS Tax Code, USA Today

Roth and Education IRA Limitations

Married couples are penalized in other ways, as well. For instance, when it comes to conversions, fewer married couples can convert a traditional IRA to one of the new Roth or Education IRAs. The ability to convert to a Roth IRA or Education IRA is completely wiped out when AGI hits $160,000. Two spouses earning $85,000 per year or more would be locked into their traditional IRA.

Married couples with equal incomes also may lose out on the $1,500 Hope education tax credit. The Hope tax credit, designed to encourage college saving, is shot down once an individual or couple's AGI hits the $100,000 mark. When you consider a two income family, that limit can be reached very quickly, and some couples may be surprised they can't take advantage of some of the newest tax breaks out there.


Adding to Investment Blues

Investment losses also negatively impact a married couple. If you take a bath in the market this year, you'll be able to deduct $3,000 on your 1999 tax return. If you and your live-in partner both lost money, each of you could deduct the $3,000 from your individual tax return (meaning both of you can deduct a total of $6,000 from your taxable income). But the moment you marry, your deduction limit is halved, since together you can only deduct $3,000.


Avoiding the Penalty

How can you avoid the marriage penalty? The obvious answer is to stay single longer. Many couples are doing just that, opting to postpone marriage because of the greater expense involved. Realisitically, postponing a marriage is not always an option.

You can also write your Congressman to have the laws changed. In recent months, Republican lawmakers have been clamoring to eliminate the "marriage penalty." However, the General Accounting Office estimates that doing so would cost the U.S. Treasury upwards of $144 billion over the next five years. Considering increased military expenditures, especially in Kosovo, and the need to shore up Social Security, some analysts on Capitol Hill are predicting such legislation may be shelved for a while. Many lawmakers can be contacted through the Senate and Congressional websites.

One of the best things you can do is utilize investments that are not affected by the marriage penalty. For instance, investments based on qualified (or pre-tax) money, such as 401k plans, traditional IRAs, and tax lien certificates are generally not affected by the penalty. Maximizing your contributions in these programs may actually reduce your taxable income every year, possibly dropping you into a lower tax bracket.

To see if your family may be subject to the marriage penalty, check out the IRS' current married income tax rates.






Penalties for Wedded Bliss
Roth IRA Limitations
Adding to Investment Blues
Avoiding the Penalty





















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