Earlier this year, I posted an article on The Marriage Tax Penalty. Most of you know that I am engaged to be married, so this is a subject very near and dear to my heart.
The marriage tax penalty is a result of our progressive tax system. As your income increases, additional dollars are taxed at increasingly higher rates. When two people get married and file jointly, the income of the second spouse is added to that of their spouse. Depending on the amount of earnings of the spouses, there can be an increase in taxes, a decrease in taxes, or very little change at all.
For some couples, the tax cost of being married will be almost as much as a really nice wedding except you have to pay the additional tax every year! No wonder so many Americans aren't getting married! However, other than spending your life with the one you love - there are some tax benefits to being married.
Legal Benefits of Marriage
Marriage vows mean different things to different people, but the legal benefits are the same. Federally, there are over 1,100 statutory provisions in which marital status is a factor in determining benefits, rights, and privileges. When legally married, your spouse is entitled to visitation rights and came make medical decisions on your behalf in the event of hospitalization - unless otherwise specified in a living will. Your spouse will have property and inheritance rights, even if there is not a will and will have the ability to receive Medicare, Social Security, disability or veteran's benefits - if applicable. There are also some tax benefits to being married...
Capital Gains Tax on Sell of Primary Residence
Married couples who file jointly can make up to $500,000 in profit on the sale of their primary residence without having to pay any capital gain tax. Singles, married couples who file separately, and unmarried couples are only exempt up to $250,000.
To qualify, you must have owned your home for at least five years and lived in the home for at least two of those five years. The IRS will count the time that a married couple lived in the home before they were married. So if you lived together in a house for a year before you were married, you only have to live there for a year as a married couple to pass the primary residency test.
Most of you know you can make tax-deductible contributions to an IRA. That means you can put money away in your IRA account - up to $5,500 - before taxes. Under normal circumstances, you can only deduct contributions that you make to your own IRA, not someone else's. But here's where married couples get a break. If you meet certain conditions, you can pay money into your spouse's IRA and deduct up to $11,000 on your joint tax return.
However, the deduction limit phases out between $178,000 and $188,000 in combined AGI if one spouse participates in an employer-sponsored retirement plan in addition to your IRAs. If both spouses participate in an employer-sponsored retirement plan, then the income phase-out range drops down to $95,000 to $115,000.
But, the good news is that there are no income restrictions at all if neither spouse has an employer-sponsored retirement plan - like us small business owners! If you are over 50, you can deduct up to $6,500 - so married couples over 50 can deduct up to $13,000 for IRA contributions!
and finally... Estate Tax Exemptions
If your spouse is a U.S. citizen, you can leave your spouse an unlimited amount when you die with no estate tax. The IRS calls this the marital deduction privilege. Also, you have a lifetime $5.12 million federal estate tax exemption that will transfer to your spouse when you pass. This means, your spouse can combine what's left of your estate tax exemption with their own and leave up to $10.24 million - tax free - to heirs.