Should you marry when you’re young or old? Keep your marriage open or closed? Change your name, or not? Should you marry at all? (Oprah doesn’t think so.)
These are questions many couples grapple with, but marriage also comes with financial consequences. It can significantly alter your taxes, student loans, and chances of getting a mortgage, among other things.
So don’t wait to think about “for richer, for poorer” until it’s time to take the vows. Here are three key financial factors to consider when you’re deciding whether to tie the knot.
There’s a widely held belief that marriage comes with tax perks: namely, that a married couple’s combined tax bill will fall. But it’s also possible that you and your partner could face a marriage penalty, paying more in taxes on your combined income than if you both stayed single.
According to a recent analysis by the Tax Foundation, marriage bonuses in the US can be as high as 21% of a couple’s combined income. Marriage penalties, on the other hand, can reach 12% of a family’s income.
Here are the questions to ask to see whether you and your partner are likely to face a marriage bonus or penalty.
How much do you make relative to your partner?
Marriage bonuses usually happen when couples with very different incomes file together. That’s because the US tax system is designed to subsidize traditional, single-earner families, where one partner goes to work and the other stays at home.
When a person with a much larger income marries someone with a much smaller income, the additional income is usually not enough to edge the couple’s combined income into a higher tax bracket. Instead, the combined income falls into a lower, married-couple tax bracket, because brackets for couples are larger than those for single filers. The end result? A lower tax bill.
Here’s an example. Suppose two people together make $60,000. One person earns $20,000 a year while the other makes $40,000. If they filed separately, the lower earner would pay $2,330 in taxes while the higher earner would pay $6,230. Together, the unmarried couple would owe $8,560 to the government, according to the Tax Foundation,.
But if they filed jointly, they’d owe $8,529 on their family income of $60,000, leaving them $31 richer. Date night at Chipotle! (“Yes, we will have the guacamole.”)
Research shows that marriage bonuses, however small, can have effects on how much couples choose to work. An analysis from the Congressional Budget Office (CBO) showed that filing together encouraged higher-earning partners to work more than they would have if they were single, while lower-earners worked less. And overall, couples who filed together worked less, making their total earnings lower than they would have been if they’d filed separately.
Are you wealthy?
Before the recent US tax reforms, marriage penalties were particularly high for medium- and high-income earners. But under the new law, marriage penalties only tend to hit high-income families. That’s true even if each person in the relationship makes a similar amount of money.
Let’s say a couple with equal incomes earns a combined $1,000,000. If they didn’t get married and filed separately, they would each owe $164,419 in taxes. But if they file together, they would owe $329,728, almost $900 more than when they filed separately.
Do you have a child?
The Earned Income Tax Credit provides support to low-income parents. But it phases out at a certain income range, which means adding another person to your family could make you ineligible for the credit.
Here’s an example. If you make $15,000 a year and have one child, you’re eligible to receive close to $3,500 under the credit. If you were to marry someone who also made $15,000, you could only claim $2,573 in benefits. So the choice to marry and file jointly, in this particular scenario, would cost your family more than $600 a year. (This also factors in that once married, no one person can claim head of household, which raises a couple’s taxable income.)
The bottom line is marrying can change your tax rate, in either direction. (You can run different scenarios with the Tax Foundation’s calculator.)
When two people get married, each person remains responsible for their own student loans. But marriage might make your monthly loan payment increase. When you wed, the Revised Pay As You Earn federal loan repayment plan recalculates your monthly payments based on your combined household income, regardless of whether you file taxes with your partner or separately. Usually, that means your payments will rise.
Other plans, like the Pay As You Earn plan, give couples the option to pay off their student debts based on their personal incomes, as long as they file their taxes separately. But that forces a couple to forsake the potential tax benefits of filing jointly.
Marriage might also disqualify you for a student loan interest deduction. Under the student loan interest deduction, you can deduct up to $2,500 from your taxable income. But you’re only eligible for the deduction if you make less than $80,000 a year, or $160,000 if filing jointly. If you marry someone who makes far more than you, it’s possible you will no longer qualify for the deduction, even if your individual income falls below $80,000.
Things can also get complicated if your partner decides to take out a student loan after the two of you marry. If you co-sign the loan and your partner is unable to pay it, you’re legally responsible for paying it off, maybe even after divorce.
If you and your spouse want to open up a joint account, both of you need good credit in order to get the best interest rates. Once you open up joint accounts, those accounts will factor into your personal credit score. If one partner has poor spending and repayment habits, it can dent both partners’ credit profiles.
Of course, it’s entirely possible to keep your finances separate when you’re married. But your partner’s credit score will still matter when you take out a joint loan together for, say, a house. A mortgage lender will factor in both you and your spouse’s credit scores before deciding what loan rate to offer. If your partner has a really poor credit score, it’s likely you’ll face a higher mortgage rate than you would have on your own.
A higher mortgage might make it harder for you to meet your monthly payments, forcing you to maintain a higher balance on your credit card, which ultimately, will pull down your credit score.
“When our accountant ran the numbers for us a few years back, we discovered marriage would cost us substantially more,” said Justin Wolfers, an economist who is in a relationship with fellow University of Michigan economist Betsey Stevenson. “I love Betsey and all, but is the marriage certificate worth thousands of dollars annually?”
The pair, who know a thing or two about economics, decided it wasn’t. They never wed.