How Marriage Can Affect Your Finances
On June 26, the Supreme Court of the United States ruled that the U.S. Constitution guarantees the right to same-sex marriage. This means that same-sex couples in all 50 states can now legally get married anywhere in the country. Although this is a great victory for same-sex couples emotionally, it may still not make sense for some couples financially. All couples daydreaming about marriage, gay and straight alike, should think carefully about all financial ramifications before diving into the marriage contract.
What’s Good for Everyone
Pretty much all married couples will benefit from these perks:
- Insurance. For those whose employers offer additional benefits to spouses and children only, health insurance may be one of the best financial reasons to get married, as you will be able to see an immediate financial benefit. Also, some types of insurance (like auto and long-term care) will offer discounts to people who are married. Finally, if your significant other dies on the job, you will be able to get workers’ compensation benefits only if you are married.
- Pensions and other retirement benefits. Many employer pensions may come with survivor benefits, which will extend the employee’s pension benefit to a spouse even if the employee dies. These benefits generally can’t be received by a non-spouse, so marriage is usually beneficial in this case.
- Social Security. In previous blogs, we have discussed how spouses can be covered under each other’s benefits, and they can use the “file and suspend” strategy to make the most of each other’s benefits. Non-spouses can’t do this, nor can they recover any survivor benefits if one predeceases.
- Property taxes. In California, Proposition 13 keeps real property from being reassessed (i.e., keeps property taxes low) unless there is a change in ownership. Transfers of real property between spouses are automatically excluded from reassessment, which can simplify inter-spousal transactions. Transfers between domestic partners or co-tenants can also avoid reassessment, but they might require that a claim be filed to do so.
- Gift and estate taxes. As long as both spouses are U.S. citizens, they have an unlimited marital deduction when it comes to gift and estate taxes, which means that each spouse can gift (during life, or after death via a will) an unlimited amount to the other without incurring any gift or estate tax. If you are not married, you will have a $14,000 annual exclusion limit (per person) and a $5,430,000 lifetime exemption (covering all gifts to all people) in 2015. This means your significant other is treated like any other person in your gifting plan. If you have a high net worth, marriage to your partner is almost essential in order to take advantage of advanced estate gifting and planning strategies.
What Needs a Closer Look
What benefits some in marriage may not benefit others. Here are some points to analyze before you decide to get married:
- Income taxes. Usually marriages that benefit from the “married filing jointly” tax status are ones in which only one person works or one person earns a significantly higher income than the other. Couples who have approximately equal incomes can be subject to a “marriage penalty.” For example, if your taxable income is the same and you are both somewhere between $76,000 and $90,000, you will be bumped from the 25% tax bracket to the 28% bracket. If you both make from $116,000 to $189,000, you will be bumped from the 28% bracket to the 33% bracket. And since the threshold for the 33% bracket is $411,500 for both single and married, two-income households that make over $200K each will usually be penalized for it.
- Ownership of property. California is a community property state. That means that any property acquired during marriage is owned jointly by both spouses. Exceptions are inheritances and specific gifts to a named spouse. Property owned before marriage is separate property. However, any separate property can become community property if it is commingled with existing community property (e.g., separate and community funds are put in the same bank account). If there is a divorce, community property will be split 50/50, and each spouse will keep their own separate property. Furthermore, if the marriage is considered “long term” (usually 10 years or more), spousal support may be ordered by the court to be paid indefinitely, depending on circumstances. A prenuptial agreement can change these rules to how you both see fit for your situation.
- Tax exemption on sale of primary residence. If you sell your primary residence as a married couple, you receive a $500,000 exemption on any capital gains you recognize from the sale. As an individual, you would receive only $250,000. However, you can still receive a $500,000 exemption if you own the residence with a non-married partner as joint tenants or tenants in common. If you own as joint tenants, your partner’s half of the property will go directly to you upon death, with a carryover basis. If you own as tenants in common, your partner’s share of the property will go to whomever they designate by will (or via intestacy laws), but the heir will get a stepped-up basis. A married couple owning the residence as community property with right of survivorship can solve these potential dilemmas by allowing the property to transfer immediately to the surviving spouse with a step up in basis at the first death.
- Debt. In community property states like California, any debt acquired by a spouse during marriage will be owed by the community, regardless if only one signed paperwork. You can enter into a pre- or post-marital agreement to change this, but the agreement would have to be signed before the debt was incurred. If your partner is not financially responsible, you should take this into consideration.
Marriage isn’t just romance and a wedding; it is a shared legal union in which you make sanctioned commitments to each other. It is therefore important to understand the legal and financial ramifications of marriage, including what would happen should you happen to divorce or experience the loss of a spouse.
Disclaimer: Consult your tax advisor before taking any action on topics discussed in the blog.