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Saying “I Do” To Each Other – And Higher Taxes

Saying “I Do” to Each Other – And Higher Taxes

Since when has saying  ‘I do’ meant paying more to Uncle Sam? Actually, prior to 2003—and again, beginning this year.

With the passage of the Jobs and Growth Tax Relief Reconciliation Act back in 2003, the so-called marriage penalty temporarily disappeared and couples of similar incomes began receiving tax treatment equal to those of single filers. The marriage penalty was what we like to call an ‘asymmetrical’ application of taxes, in that it favored folks in the single-filer tax category. Life without the marriage penalty changed the tax landscape so that if two people had the same income and deductions, their bottom line tax bill remained the same whether they stayed single or got married.

Unfortunately, with the passage of the American Taxpayer Relief Act of 2012 and the Affordable Care Act, walking down the aisle will again mean paying more in taxes. Here’s why: The signing of these two acts brought about three new income thresholds. The first is the Medicare Surtax, a 3.8% tax that applies to single filers with an Adjusted Gross Income (AGI) over $200,000, and couples who are married filing jointly and have an AGI greater than $250,000. The next two thresholds are the phase-out of itemized deductions and the introduction of the highest ordinary income tax bracket. Itemized deductions start phasing out at AGIs of $250,000 and $300,000 for taxpayers single and married filing jointly, respectively. Finally, taxpayers move into the highest marginal income tax bracket at AGIs of $400,000 and $450,000, respectively.

Let’s put all of this information together to see how the penalty works under the new tax system. To do so, we’ll examine fictional couple Ricky and Lucy’s tax life. Cupid’s arrow hit them a year ago. They’re engaged and set to marry in 2014. Ricky and Lucy each make $300,000 annually. Due to their high state income taxes and generous charitable inclinations, they each have itemized deductions of $30,000. For 2013, each of their individual federal tax bills is $79,000, so they’ll pay a total of $158,000.

Fast forward to a year from now, after they’re married, and their 2014 tax situation looks quite different. They ratchet up from a combined (as singles) tax bill of $158,000 to a married-couple tax bill of $190,000! Simply saying ‘I do’ ended up costing our newlywed couple an additional $32,000 in tax.

However, they have some options. To avoid paying increased taxes during their working years, Ricky and Lucy could start deferring some of their income into 401(k)s. As of 2013, the maximum retirement contribution for an individual is $17,500 (plus an additional $5,500 for people age 50 and over). If Ricky’s or Lucy’s company offers a deferred compensation plan or Health Savings Account (HSA), both of those options could also be considered. Check here for more information on HSAs and deferred compensation plans.

Our fictional couple may also want to consider reducing taxes by increasing their charitable gifts. However, instead of increasing their donations all at once, they could open or add to a donor-advised fund (DAF). The use of a DAF could allow Ricky and Lucy to offset income gifts in higher income years, but payout those gifts to charity at a later date.

For more information on strategies for cutting your taxes both today and for the future, please contact your Wealth Advisor and your tax advisor.

 

Important Disclosure Information

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic.  This information is current only as of the date on which it was sent.  The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic.  Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

Please remember that RegentAtlantic does not provide tax advice.  Please consult with a tax professional of your choosing prior to implementing any of the strategies discussed in this article.

This information is based on RegentAtlantic’s current understanding of tax legislation.  Congress may change this legislation at any time.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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