Marriage is a blessing, or is it? Conflict over money and finances is one of the primary reasons marriages fail. Untangling the finances of a married couple can be an extremely complicated and costly process. With the successful passage of marriage equality, the narrative of my LGBTQ+ clients has shifted. What was once, “How do we plan since we can’t get married?” has become, “Just because we can, does that mean we should?”
The financial ramifications of marriage impact almost every aspect of your financial plan, including taxes, retirement, budgeting, insurance, and more.
So let’s explore the financial pros and cons of marriage – gay or straight.
Five Financial Benefits of Marriage
1. Tax Savings
Married couples who file their tax returns jointly may qualify for higher tax deductions and credits than single filers. For example, single filers have a standard deduction of $13,850 but couples enjoy a standard deduction twice that at $27,700. If you find yourself itemizing your taxes, the decision around this may not be as straightforward, so consult your accountant or financial advisor for a closer review.
Deductions aside, married couples may save on taxes given that income tax brackets double for couples in all marginal tax rates (except the highest bracket at 37%). For example, the 32% marginal bracket begins at $182,100 for single filers while starting at $364,200 for couples filing jointly. This marriage “benefit” is often most helpful for couples with a large income disparity between spouses.
This recently played out for a same-sex couple of ours trying to understand the tax benefits versus costs of tying the knot. The lion’s share of household income was made by one partner at $425,000, where the other partner earned $80,000. We found that filing jointly as a married couple would save them over $40,000 in Federal taxes annually versus filing separately as single filers. Armed with this information, the couple said “I do” and saved thousands on taxes.
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2. Social Security Benefits
Social Security offers ample benefit opportunities for couples that single peers aren’t able to leverage. For example, if one spouse’s estimates are more than twice as high as the other’s, it might make sense for both to eventually collect on the same spouse’s earnings record.
In that situation, the spouse with lower benefits can claim first based on their own earnings record then apply for spousal benefits later when the higher benefits spouse starts to collect.
The longer the higher benefit spouse waits to start collecting, the higher benefits will be for both spouses. Delaying the higher earning spouse’s benefits could also eventually increase the other spouse’s survivors benefits.
3. Reduced Insurance Costs
Whether happily riding solo or married, it’s a good idea to shop around for auto, homeowners, and similar insurance policies after you tie the knot. Married couples typically qualify for lower premiums than if they were to apply individually as single policyholders. This may not always be the case, though (more on that in the Cons section below).
4. Access to Workplace Benefits
If your spouse has access to certain benefits that you don’t have through your employer, you may be able to take advantage of them for yourself. If you’re out of the workforce altogether, your spouse could be your ticket to qualifying for key insurance coverages. Depending on the employer benefits of the company, it could be substantially less expensive to elect family coverage on your spouse’s employer health plan than if you shopped for your own coverage in the healthcare exchange marketplace.
Besides taking advantage of workplace benefits, you may also be able to find military benefits and perks from other organizations your spouse belongs to.
5. Individual Retirement Account Contributions
Married couples have additional opportunities to save for retirement not available to unmarried couples. Individual retirement accounts (IRAs) can provide tax benefits for those who contribute, but you must meet certain income requirements to be able to contribute to a Roth IRA.
While there’s no income limit for Traditional IRAs, you can’t deduct contributions if your income is too high. Married couples benefit over non-married peers when one spouse has little to no income while the other technically benefits from a higher limit than what they would have if single. What’s more, a spousal IRA lets a working spouse contribute to an IRA on behalf of their non-working spouse who earns little to no income.
In 2023, this means a working spouse could make a $6,500 contribution for themselves plus a $6,500 contribution to a spousal IRA. For couples 50 and older, an additional catch-up contribution of $1,000 can be made. Compound this maneuver over two decades of saving and the married couple could find themselves with a much larger retirement bucket versus their friends who elected to remain unmarried.
Five Financial Cons of Marriage
1. Higher Taxes
But wait, didn’t we say marriage could save on your taxes? The answer is, it depends. Filing jointly could potentially launch you into a higher tax bracket and cost you money. Plus, not all deductions are doubled when filing jointly versus single. It’s important to understand this calculation is on a case-by-case basis. Thankfully, you have professionals willing to dive into this equation for you. Talk with a tax advisor or financial planner to help you crunch the numbers.
2. Higher Student Loan Payments
If you or your partner are saddled with student loan debt, filing jointly could raise your student loan payments. On an income-based student loan repayment plan, your lender could use the other spouse’s higher income to justify raising your monthly payment. The only way lenders can get this information is by looking at a joint tax return, so you might want to consider filing separately or moving to a fixed payment plan until your student loans are paid off.
3. Higher Auto Insurance Premiums
If you live together, most insurers allow you to add a significant other to your car insurance policy, such as a boyfriend, girlfriend, fiancé, or domestic partner. Auto insurance companies assume that married people who share a home also share cars. Therefore, they might automatically add your partner as an approved, covered driver on your vehicle. If you and your partner have similar driving records, your insurance provider won’t see adding them as higher risk. If your partner has a worse driving record than you, being married could raise your premiums.
With most insurers, unmarried couples can share a joint car insurance policy or add each other as listed drivers on separate policies, so check with your insurer to see if shared or separate coverage is best for you.
4. Negative Credit Impacts
Your spouse’s credit could negatively impact your loan terms. When you apply for joint loans as a married couple (mortgages, auto loans, etc.), lenders will look at the “lower middle” of your credit scores. For example, if your credit scores from the three credit bureaus are 730, 705, and 693 and your spouse’s are 598, 584, and 572, lenders will use 584. As a result, your partner’s imperfect credit could lead to less appealing loan terms (e.g. 9% versus 5%).
5. Divorce Statistics
According to the American Psychological Association, approximately 40% to 50% of first marriages end in divorce. The divorce rate for second marriages is even higher, with approximately 60% to 67% of second marriages ending in divorce. To protect yourself against these divorce odds and their consequential financial ramifications, consider learning about a prenuptial agreement and if one is right for you.
Weighing Your “I Do” or “I Don’t” Options
It’s never too early to start a conversation about money with your partner. After all, money is the number one thing couples disagree about, but that doesn’t have to be you.
Schedule a call with an Abacus financial advisor who can help you understand how getting married can impact your wallet – for better, for worse, for richer, for poorer. (But hopefully not poorer!)
Disclosure: This material is not intended to serve as personalized tax, legal, and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Abacus Wealth Partners, LLC is not an accounting firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.
