Dear Carrie, My partner and I have two children. We aren’t married but are considering it. What are the financial benefits of marriage? –A Reader
Dear Reader, When it comes to money, marriage does change things. From owning property to retirement planning to estate planning to filing taxes, the rules are different — and largely more favorable.
But like so much in personal finance, you have to understand the rules to get the maximum benefit. In some cases a couple may get hit with a higher income tax bill, but from a personal finance perspective, the positives of marriage far outweigh the negatives.
One of the most significant advantages of marriage is eligibility for Social Security spousal and survivor benefits. First, as a married couple, you’re each eligible to collect your own Social Security benefit or up to 50 percent of your spouse’s benefit, whichever is greater. In addition, a widow or widower is eligible to collect up to 100 percent of the other’s benefit. Plus, Social Security can provide important benefits for minor children whose parent is deceased or disabled.
When it comes to income taxes, marriage has pluses and minuses. While you’ll be able to choose between filing a joint or separate income tax return, this doesn’t mean that your combined tax bill will go down. In fact, filing jointly could bump you into a higher tax bracket. On the other hand, one-earner families may fall into a lower tax bracket.
And while the standard deduction is higher for a couple, combining your income could impact some of your deductions if you itemize. Filing separately, however, can lower or eliminate certain credits like the child tax and earned income credits and may cut deductions for IRA contributions. As you can see, it’s a bit of a balancing act, so probably wise to talk to your tax advisor to see which is best.
Here are a few definite pluses:
–When an unmarried person includes a partner on their health insurance plan, that benefit is taxable. For married couples, premiums to cover both are tax-deductible.
–A non-working spouse can contribute to a Spousal IRA as long as the working spouse has income to cover the contribution. These contributions will have the opportunity to grow tax deferred, and may also be a deduction.
–If you inherit an IRA from your spouse, you can basically treat it as your own and postpone taking required minimum distributions until the year you turn 70, potentially giving your assets more time to grow tax-deferred.
Marriage aside, make sure both your names are on the title of any property you own together. Otherwise, the unnamed partner is vulnerable in case of divorce or death. For estate planning purposes, you may also want to discuss with an attorney whether setting up a revocable living trust makes sense for your situation
The IRS seems to smile on marriage when it comes to gift and estate taxes. Married couples can transfer an unlimited amount of property to each other free of any reporting or gift tax. They can also use “gift splitting” to essentially double the amount they can jointly give to a third party.
Plus, a married person can generally leave an unlimited amount of money to their spouse without paying any estate tax. In addition, the surviving spouse can use any unused portion of the deceased spouse’s lifetime estate tax exclusion upon his or her death. Under current law, this means that a married couple can pass on up to $10.98 million free of federal estate tax.
Depending on your current insurance policies, being married could result in anything from small savings on premiums to greater choices in coverage. Here are a few to be aware of:
–Health: If you have separate policies, either through your employers or independently, getting a family policy from a single provider may be a much better deal.
–Car: Not every automobile insurance company allows domestic partners to share a policy. Not a concern if you’re married. And having a single policy for all your vehicles can lower premiums.
–Bundling: As a married couple, you can bundle homeowners, car and umbrella policies, potentially bringing premiums down.
A spouse may also be eligible for a variety of employee, veterans and federal government benefits. For example, when it comes to military and veteran benefits, a military spouse may be eligible for health care and family separation pay. In addition, spouses of deceased veterans may be entitled to benefits such as health care, educational assistance, home loan guarantees and pensions.
There’s also a broad array of benefits for spouses of federal government employees, including health, retirement and survivor benefits.
While money should never be the reason to marry, it can be a financial plus. Just make sure you and your partner understand and agree on how you’ll share responsibilities, combine finances and pass your money values on to your children. That’s most important–whether or not you decide to marry.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can email Carrie at [email protected] Information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.