Monday, April 15, 2013

PSA: The Marriage Penalty

Image Credit

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. 

19 comments:

  1. That happened to us when we got married... to the tune of $5000. Ouch. We were able to move some savings into a traditional IRA to reduce the amount, but it still stung. We've been married for 6 years and this is the first year we're getting a refund.

    ReplyDelete
    Replies
    1. Wow! We owe less than $1000, but it still stings. Especially since I currently have - no joke - $3 in my checking account. I can't imagine owing $5000! I'm glad you're finally getting a refund!

      Delete
  2. I could have told you being married with no kids hurts a lot at tax time. K and I always claimed zero so they'd take out the most taxes and also had our payroll take out even more money from our paychecks so that we wouldn't owe. It's crazy. Having a kid now gets us some bucks back. The most we'd ever seen, but we're not making a killing off of the kid either.

    ReplyDelete
    Replies
    1. So claiming 0 is the way to go? Okay. I will do that. (I need to update my W-4s at the school this week!)

      Delete
  3. Oh, wow. That's a horrible surprise I did not like learning. I'm an independent contractor, so I get reamed on taxes. This year I'm paying about $2000. I cannot express to you how much I don't have an extra $2000. Although if it goes towards fixing the wretched potholes on the street by my apartment, I suppose it might be worth it.

    ReplyDelete
    Replies
    1. Nathan was an independent contractor one year, and I amend my previous statement - that was the one year he had to pay taxes, and it wasn't pretty! I do think, in general, that taxes are worth it, and I don't mind paying them. It's just the fact that we weren't expecting to owe anything, and thus didn't prepare, that's so irritating!

      Delete
    2. Yeah, I'd imagine not having time to prepare financially (and emotionally! hah!) makes it a lot worse. I'm sorry :/

      Delete
  4. Everyone is getting the short end of the stick these days when it comes to taxes. For the first time in 27 years of marriage we are having to pay but the amount is nominal...less than dinner and a movie. Losing the child tax credit and not qualifying for any education deductions because the first year of college for our daughter was mostly covered by scholarships and grants cost us. However I feel fortunate that we almost broke even so we had all of OUR money to use in 2012 rather than loaning it to the govermnent for a year interest free. I'm sorry you are having to pay. I dare say however, that marriage is worth it.

    ReplyDelete
    Replies
    1. For the most part I don't mind paying taxes, because I think mostly, they do a lot of good (schools, emergency services, roads, etc). It's just that we were uninformed and uneducated, and thus weren't prepared for the fact that we wouldn't get a refund and would have to actually pay. Which is our own fault, and a lesson we've definitely learned! :)

      Delete
    2. Oh, and I hope it's clear that while I regret the fact that we weren't prepared to pay our taxes this year, I do NOT regret getting married in any way. :)

      Delete
    3. I totally agree Chrissy. I don't mind paying taxes either. I just don't want to overpay and have money my family could have used tied up with the government for a year. Which lets face it, isn't always the best place for excess money to end up, regardless of politics.

      And I never once thought you regretted getting married. I so enjoy coming here and reading about your life and adventures with Nathan. I wish you joy and peace and focus to finish that novel that I am looking forward to reading one day.

      Delete
    4. I agree completely - while I don't mind paying taxes, I sure could use the money I'm now obligated to fork over. :P

      And thanks for the sweet wishes for joy, peace, and focus. So thoughtful and so appreciated. <3

      Delete
  5. Yikes, that stinks! Google just ate my longer comment, but suffice to say I didn't realize that filing jointly as a married couple can burn you like that. It makes sense since our taxes are not just a percentage of your income, no matter how much you make. I imagine you are not the first newlyweds to get burned by this--I'm so sorry :-(

    ReplyDelete
  6. We were married on the same weekend as you, filed jointly, and didn't notice much change (collectively). Of course, he makes like double of what I do, so who knows??

    ReplyDelete
    Replies
    1. If he makes more than you, you might actually end up with the marriage bonus! I hope so, for your sake!

      Delete
  7. I second Zay-- I have always claimed zero. Also, the newest W4 I filled out had a formula you could use to calculate, based on your family's income, how much extra you should have reserved from the check so that you don't have to pay taxes at the end of the year. So in addition to the big amounts they are already taking out, they also take out another healthy chunk. In our situation, I would rather have a lot taken out of my paycheck each month rather than pay a huge chunk at once... then if/when we get a refund, it's a great bonus we use to pay student loans. It works for us. Either way, it has always worked well for us to both claim zero.

    ReplyDelete
    Replies
    1. So much math! I agree - I'd also rather pay it overtime than all at once, because it is rare that I have any amount of money all at once.

      Delete
  8. The first year John and I were married I didn't make much less than he did but we still got a nice refund because of my tuition statement. I think we've always claimed 0. This last tax year I also paid a lot of interest on student loans so that helped. That, and John puts a bunch of money into his IRA. I can't believe you owe what with you both taking courses!

    ReplyDelete
    Replies
    1. I'm really looking forward to being fiscally responsible once we're out of school. It's hard now, when we have so little, but one day!

      Delete