The IRS at the Wedding


Summer is a popular time for weddings, with the majority of all weddings occurring between June and September. Weddings are beautiful, romantic, and fun. They are also expensive. The average cost of a wedding in 2012 was $25,660, and more than $50 billion is spent annually on weddings in the US. Couples are often willing to spend a small fortune for their perfect day, but what they might not realize is that they could be facing some serious financial surprises come tax time.  

Friends and family aren’t the only ones paying attention to “will they or won’t they” speculation surrounding a couple getting married. The IRS has a keen interest in the marriage business, not only because they receive a chunk of the $50 billion spent each year, but also because marriage can affect income tax returns and a couple’s tax bill. This is often called the “marriage penalty.” Let’s use newlyweds Mike and Sarah to demonstrate some of the ways the IRS can affect taxes when a couple gets married, using different levels of income.  

The classic marriage penalty occurs when two spouses, earning roughly equal amounts, earn enough together to push their taxable income into the 28% bracket for joint filers. For 2012, that bracket started at $142,700. In this scenario, Mike and Sarah each reported $100,000 in 2012 taxable income before the wedding, so they each owed $21,454 in tax. But if they got married any time before the end of the year and reported $200,000 in joint income, they would owe $43,779 together. While that’s only $871 more than they’d pay separately, it’s still almost $1,000 extra that goes to the IRS. Over time, this can really add up.

If children are involved, taxes may increase even more. For example, if single Sarah’s income is less than $75,000, she gets a $1,000 child tax credit if she has a qualifying child. But when she and Mike get married and file together, they are not eligible for a credit if they each make $75,000, because the credit begins to phase out at just $110,000.  

Another example of how Mike and Sarah’s taxes might change is due to the Affordable Care Act, which imposes a 0.9% Medicare surtax, starting this year, on earned income over $200,000 for single filers and $250,000 for joint filers. In this instance, if Mike and Sarah each report $130,000 in earned income separately, filing as single, there is no surtax. But if they report the same $260,000 as husband and wife, the IRS receives an additional $1,350.

Owning rental property could be yet another marriage penalty. Most rental properties lose money on paper, and there's a special "rental real estate loss allowance" that lets a taxpayer deduct up to $25,000 of rental loss against other income, as long as that income doesn't top $150,000. When Mike and Sarah get married, they can still take that same $25,000 loss – so long as their combined income doesn't top that same $150,000. If they decide to file separately, and lived apart for the year, they get just $12,500 each. If they file separately and lived together during the year, the allowance is zero.  

The IRS pays attention to big life changes reported on a taxpayer’s return, including large boosts in income, relocations, and, yes, changes to filing status. Marriage is major life event and can bring immeasurable happiness. Just make sure you plan accordingly and are prepared for the tax implications. The good news? At least for one day, you got to have your cake and eat it too!