Marriage is a significant milestone that brings about many changes, including financial ones. One of the most notable financial advantages of marriage is the potential for substantial tax benefits. Understanding these benefits can help couples maximize their savings and make informed decisions about their finances.
Here are the top five tax benefits of getting married:
- Higher Standard Deduction: One of the most immediate and impactful tax benefits of marriage is the higher standard deduction available to couples who file jointly. For the tax year 2023, the standard deduction for married couples filing jointly is $27,700. This is significantly higher than the standard deduction for single filers, which is $13,850. By taking the higher standard deduction, married couples can reduce their taxable income, which in turn lowers their overall tax liability. This benefit alone can result in substantial tax savings, making it a key advantage of filing jointly.
- Example: John and Jane are married and decide to file their taxes jointly for the 2023 tax year. Their combined income is $80,000. By filing jointly, they can claim the standard deduction of $27,700, reducing their taxable income to $52,300. If they were single, each would only be able to claim a standard deduction of $13,850, resulting in a combined deduction of $27,700. This higher standard deduction for married couples filing jointly helps them reduce their taxable income more effectively.
- Example: John and Jane are married and decide to file their taxes jointly for the 2023 tax year. Their combined income is $80,000. By filing jointly, they can claim the standard deduction of $27,700, reducing their taxable income to $52,300. If they were single, each would only be able to claim a standard deduction of $13,850, resulting in a combined deduction of $27,700. This higher standard deduction for married couples filing jointly helps them reduce their taxable income more effectively.
- Eligibility for Various Tax Credits: Filing jointly can make married couples eligible for several tax credits that are either reduced or unavailable to those filing separately. These credits can significantly reduce the amount of tax owed and, in some cases, even result in a refund. Some of the most valuable credits include:
- Earned Income Tax Credit (EITC): This credit is designed to benefit low- to moderate-income working individuals and families. The credit amount increases with the number of qualifying children and can be substantial for those who qualify.
- Example: Maria and Carlos are married with two children and have a combined income of $40,000. By filing jointly, they qualify for the EITC, which provides them with a credit of approximately $5,980. If they filed separately, they might not qualify for the same amount or any credit at all.
- Example: Maria and Carlos are married with two children and have a combined income of $40,000. By filing jointly, they qualify for the EITC, which provides them with a credit of approximately $5,980. If they filed separately, they might not qualify for the same amount or any credit at all.
- Child and Dependent Care Credit: This credit helps offset the cost of childcare for working parents. It can cover a percentage of qualifying expenses for the care of children under 13 or other dependents who are physically or mentally incapable of self-care.
- Example: Sarah and Mike both work and pay $6,000 annually for daycare for their 3-year-old child. By filing jointly, they can claim the Child and Dependent Care Credit, which covers up to 35% of their qualifying expenses, resulting in a credit of $2,100.
- Example: Sarah and Mike both work and pay $6,000 annually for daycare for their 3-year-old child. By filing jointly, they can claim the Child and Dependent Care Credit, which covers up to 35% of their qualifying expenses, resulting in a credit of $2,100.
- Earned Income Tax Credit (EITC): This credit is designed to benefit low- to moderate-income working individuals and families. The credit amount increases with the number of qualifying children and can be substantial for those who qualify.
- Lower Tax Rates: Married couples filing jointly often benefit from lower tax rates compared to single filers. The tax brackets for joint filers are generally more favorable, which can result in a lower effective tax rate on combined income. For example:
- Single Filers: If both Alex and Taylor are single and each earns $50,000, they fall into the 22% tax bracket for single filers. Their combined taxable income is $100,000, and they would each pay taxes separately.
- Married Filing Jointly: If Alex and Taylor are married and file jointly with a combined income of $100,000, they fall into the 12% tax bracket for income up to $89,450 and the 22% tax bracket for the remaining income. This results in a lower overall tax rate compared to filing separately.
- Single Filers: If both Alex and Taylor are single and each earns $50,000, they fall into the 22% tax bracket for single filers. Their combined taxable income is $100,000, and they would each pay taxes separately.
- Spousal IRA Contribution: Marriage can also enhance retirement savings opportunities. If one spouse is not working or earns significantly less, the working spouse can contribute to a spousal IRA on behalf of the non-working spouse. This allows the couple to maximize their retirement savings and take advantage of the tax benefits associated with IRA contributions. For 2023, the contribution limit for IRAs is $6,500 per person, or $7,500 for those aged 50 and over. By utilizing spousal IRA contributions, couples can effectively double their retirement savings potential. For example:
- Single Filers: Lisa is a stay-at-home parent with no earned income, and her spouse, Mark, earns $70,000 annually. If they were single, Lisa would not be able to contribute to an IRA due to lack of earned income.
- Married Filing Jointly: Since Lisa and Mark are married, Mark can contribute up to $6,500 to a spousal IRA on Lisa’s behalf (or $7,500 if Lisa is 50 or older). This allows them to maximize their retirement savings and benefit from the tax advantages of IRA contributions.
- Single Filers: Lisa is a stay-at-home parent with no earned income, and her spouse, Mark, earns $70,000 annually. If they were single, Lisa would not be able to contribute to an IRA due to lack of earned income.
- Exclusion of Gain on Sale of Home: Homeownership comes with its own set of tax benefits, and marriage can enhance these benefits. Married couples filing jointly can exclude up to $500,000 of capital gains on the sale of their primary residence, provided they meet certain conditions. This is double the exclusion amount available to single filers, which is $250,000. To qualify for this exclusion, the couple must have owned and lived in the home as their primary residence for at least two of the five years preceding the sale. This exclusion can result in significant tax savings for homeowners, making it a valuable benefit for married couples. For example:
- Single Filers: If Sam, a single homeowner, sells his primary residence and realizes a capital gain of $300,000, he can exclude up to $250,000 of the gain from his taxable income. The remaining $50,000 would be subject to capital gains tax.
- Married Filing Jointly: If Sam is married to Alex and they sell their primary residence together, they can exclude up to $500,000 of the capital gain from their taxable income. In this case, the entire $300,000 gain would be excluded, and they would owe no capital gains tax on the sale.
- Single Filers: If Sam, a single homeowner, sells his primary residence and realizes a capital gain of $300,000, he can exclude up to $250,000 of the gain from his taxable income. The remaining $50,000 would be subject to capital gains tax.
Marriage brings about many changes, and the potential for tax benefits is one of the most significant financial advantages. By understanding and leveraging these benefits, married couples can reduce their tax burden and increase their overall financial well-being. From higher standard deductions and eligibility for valuable tax credits to lower tax rates, enhanced retirement savings opportunities, and substantial exclusions on capital gains from home sales, the tax benefits of marriage can provide substantial savings and financial security for couples.
