Monday, April 15, 2013

PSA: The Marriage Penalty

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We filed our taxes yesterday. This might lead you to believe that we waited until the last minute, seeing as they were due today, but that is not the case. I actually started our taxes back in February. I figured since we're so broke, we'd naturally be entitled to a tidy little refund. 

And so, that fateful day in February, I logged into my old standby, TurboTax, and started answering a series of questions. When I was asked about my marital status on December 31, 2012, I clicked "married" and indicated that we'd be filing together, before continuing on my merry way. When I got to the end of the questions, and all our information had been entered, I saw that we were NOT getting a refund this year. In fact, we OWED money. 

I have never owed taxes in all my life, and neither has Nathan. I figured I must have done something wrong - I'm no tax expert - so I closed the TurboTax window and created a new profile in TaxSlayer. Same thing. Back to TurboTax. Fill in everything exactly the same, but as if I were still legally single. And there's my refund! Except I'm not single, so that's illegal. But I thought marriage was supposed to be a tax benefit? I thought this was part of the fight for gay marriage - equality and basic human dignity, yes, but tax breaks too. So why would getting married penalize us? 

As it turns out, marriage only provides a tax break in certain situations. In other situations, it's just as common to get hit with a marriage penalty. I found a decent (though extremely sexist) explanation for this phenomenon here. ("John is an engineer who makes $72,000 a year. Suzy is a teacher who makes $30,000." Nice.) Basically, it has to do with tax brackets, and disparate incomes, and how many dependents you claimed on your W-4s back when you were single, and how that changes once you're married. Here's the advice our sexist website provides: 
Good Tax Idea: When you start planning for your wedding (or if you are going to elope) and you work for somebody – go to your human resources department and change your W-4 only after you have sat down and crunched the numbers as to what your combined income will be. Once you know your tax bracket, and depending on what you want as a couple – Do you both want a refund? Do you both want to owe just a little? Plan your deductions accordingly.
Nathan and I got married at the end of the year, but that doesn't matter for tax purposes. As far as the IRS is concerned, we must file as married for all of 2012, even though we were legally married for less than two months by the end of the year. So what we should have done is update our W-4 in early January, knowing that we'd be have to file as married. Not very romantic, but neither is owing a bunch of money you don't currently have. 

Even after I learned this new information, I was still in denial. Our combined income for 2012 still wasn't very high - I'd made nearly that much as a single person when I worked full time in Texas, and I got a decent refund then. So I kept reading, and learned this tidbit from SmartMoney.
At higher income levels, the tax rate brackets for joint filers are not twice as wide as the rate brackets for singles... On the other hand, many married couples actually collect a tax bonus from being married. If one spouse earns most or all of the taxable income, it's highly likely that filing jointly will reduce your tax bill (the marriage bonus).
Bottom Line: If you and your new spouse both earn healthy and fairly equal incomes, you'll likely fall victim to the marriage penalty. If not, you'll likely collect the marriage bonus.
While I would not call our income for 2012 "healthy," it turns out we made just enough to push us into the next tax bracket. That, combined with filing our initial W-4s as single people, means that yes, we actually owe the government money. Only once I accepted this fact, I was able to finish filing our taxes. So you can understand why I waited until April 14th. Denial is real, y'all. 

Luckily, we found some deductions (Nathan qualified for a Lifetime Learning Credit, due to his paramedic classes) so we were able to bring the amount we owed down a few hundred dollars. It's still a lot of money to owe when we have so little, but not quite as scary. We decided to set up an installment plan with the IRS (an option if you've always filed on time in the past, owe less than $10,000, and haven't paid via installments in the last five years). While we will get charged interest, it's better than our other option - paying with a credit card. On the bright side, next year will be much better, since we're both going to school full time this year, and thus cobbling together part time gigs to (barely) pay the bills. Tax refund, we WILL meet again. 

And that concludes this Public Service Announcement  I know money is boring and taxes are the worst, but I wanted to put this out there for any other couples who are planning to get hitched. Crunch the numbers and update your W-4s, or else you'll be celebrating your first anniversary with a fancy dinner of stale crackers and cheap beer. 

If you're married, did you get hit with the penalty, or the bonus? If you got a refund this year, how will you spend it? Last year I spent most of mine on our wedding venue, which now strikes me as ironic.