Foxy Lady and I have been thinking about getting a divorce. We don’t want to leave each other or be with someone else. We still love each other, probably more now having been through 6 years of marriage and having brought two amazing cubs into the world, than when we were first married. And let’s be honest: there’s no way I could do any better. Foxy Lady is foxy, is an amazing mom, has a high-powered career, let’s me stay at home with the cubs. She probably could do better, but don’t tell her that.
So we still want to remain fox and vixen, but just not in the official “married” sense. What gives? Since it’s a topic of this website, it probably has something to do with personal finance. By being married we pay about $15,000 more in taxes than if we were living in sin as two single foxes. Let me explain:
The federal tax code (and that of many states) is extremely complex and curiously set up. It is meant to be progressive (wealthier people pay a higher percentage of their income in taxes), but in an attempt to achieve that goal, lawmakers have created a bit of a cluster that has some seriously screwed up features. The “marriage penalty” is one of those.
Paying more if you’re married
Let’s look at two nearly identical couples: Mr and Mrs Leopard who are married, and Mr Tiger and Ms Lion who have been living together but never tied the knot. Mr and Mrs Leopard each have good jobs and each make $100,000. Similarly, Mr Tiger and Ms Lion each have good jobs and each make $100,000.
Mr and Mrs Leopard file jointly and owe taxes of $43,000 on their $200,000 income. However, Mr Tiger and Ms Lion together owe taxes of $39,000 on their $200,000 income. What the hell?!?!?! Mr and Mrs Leopard are seriously pissed. Mr Tiger and Ms Lion just paid for their annual family vacation Disneyworld. Or better yet, they can use that money to fund an IRA and in 30 years they’ll have an extra $320,000, thanks solely to the fact that they never said “I do.”
That seems like a pretty big deal. Being married or not has a 10% impact on the amount of taxes you pay. How is that possible? This is fundamentally an issue of figuring out who the IRS thinks is rich, remembering that we have a progressive tax code.
The IRS looks at two people with a combined income of $200,000 as being richer than one person making $100,000. Maybe that makes sense. The couple is probably pooling expenses like housing and the bills that go along with that. A single person is bearing those housing expenses on her own. That, in a nut shell, leads to the IRS taxing the $200,000 couple more than the $100,000 individual.
That’s all well and good until you have situations like Mr Tiger and Ms Lion. The rationale that the expenses for two single people go out the window because they are really acting like they are married, sharing their living expenses just like Mr and Mrs Leopard. When you choose filing status you can pick “Single” or “Married” but you can’t pick “Single but pretty much act like we’re Married.” That’s the loophole.
Paying more if you’re Single
The opposite effect also occurs. Imagine Ms Ocelot and her boyfriend Mr Panther. Ms Ocelot has a high powered career where she’s making $200,000. Mr Panther is a freeloader who watches TV and plays video games all day and occasionally writes on his blog which doesn’t generate any money.
Ms Ocelot pays $50,000 in taxes on her $200,000 income. But if she made an honest man out of Mr Panther, their tax bill would fall to the same $43,000 that the Panthers pay.
That $7000 annual difference is just the same effect as above, but in reverse. The IRS views a single person making $200,000 as being richer than a couple making that same amount. Again, it kind of makes sense; that income is only supporting one person in the “single” example but two people in the “couple” example.
What it all means
“Stocky, what is the point you are trying to make? Surely, you aren’t suggesting deciding on marrying someone based on the tax code.” I kind of am. Are you married because the state of Illinois or the US government says you are? Not really. You’re married because you love your partner, you want to take on life together with that person, you are committed to her until the end of your days. That’s how it is for me.
If the government said there was a clerical error and our marriage certificate was never filed so I wasn’t actually married to Foxy Lady, I wouldn’t love her any less. I wouldn’t be less committed to her and the two cubs we’ve brought into this world together. Actually, I have a few friends, and maybe you do too, who are as committed to each other as any married couple, but they aren’t married in law.
But since the federal government says Foxy Lady and I are married, legally we MUST file as “Married” and that ultimately leads to us paying about $15,000 more in taxes than if we acted in the EXACT same way but just never signed that piece of paper six years ago. And that’s serious money. $15,000 in our case or $4000 in Mr and Mrs Leopard’s case or $7000 in Ms Ocelot’s case really adds up. Over a life time, that could be a million dollars.
Marital advice from Stocky
So does Stocky endorses people who make similar incomes to not get married and couples where one person makes a lot more money to get married? It seems severe, but why not? This is one savings strategy that could pretty much fully fund your retirement.
Of course there’s the big caveat that you need to be in a very strong relationship. One so strong that legally being “married” or “single” doesn’t impact the real-life state of your relationship. If yours is at that level then seriously consider taking the free money the IRS is making available.
Yet, when I give that advice to people, recommending that they get divorced (but remain totally committed like they were married), they look at me like I’m crazy. How could I even suggest touching the most sacred of unions for a few bucks. Totally get it. And to date, no one has followed my advice on this, so there you go. But if your marriage is such that it can survive the US government saying your single, there could be some serious dollars in it for you.
You’ve ready my crazy theory on how to reduce your taxes. What do you think?