Most people believe that marriage is a cost-effective arrangement. This is not always true.
In my own life, getting married meant I could purchase my husband’s cheaper and better health insurance plan instead of shell out hundreds of dollars a month for a below-average self-employed option. For others, perks like the possibility of a lower tax bracket, higher deductions for charitable contributions, and even access to an IRA for a non-working spouse can add to this marital happiness.
Sharing your finances can also help you meet your savings goals and pay off debt. My husband and I repaid over $ 50,000 in student loans within two years of our marriage – a feat he probably wouldn’t have achieved without our two incomes.
But let’s stay on the topic of the student loan for a moment. There are over $ 1.57 trillion in federal student loans outstanding in the United States. Many borrowers, but not all, are eligible for some form of income-based repayment plan. These plans cap a borrower’s monthly payment at a rate based on their income rather than the outstanding loan balance and a standard 10-year repayment plan.
However, if you get married and file a joint tax return, your spouse’s income will be included in calculating how much you owe. If both parties are in debt and follow income-based repayment plans, this increase in monthly payments could be fatal to the household budget. Technically, you can still file separately, and often your payments will continue to be based solely on your income, but you won’t get the same tax benefits as being married and filing jointly. And you need to read the fine print of your income based repayment plan because some include the spouse’s income, even if it is filed separately.
The income-based repayment plan calculations are based on your adjusted gross income, family size, and discretionary income. According to Federal Student Aid, discretionary income is calculated as the difference between your annual income and 150% of the poverty line in your state for your family size.
Consider a hypothesis. Suppose you earn $ 55,000 per year as a single taxpayer. Your monthly student loan payment would be capped at just under $ 300. But if you marry someone who earns $ 100,000 a year, your monthly payment, if you file jointly, could increase to almost $ 1,075. If you’re both on income-based repayment plans, that could mean around $ 2,150 per month in payments. Some income-based repayment plans will never exceed what you would pay over a standard 10-year period, but the REPAYE program has no cap and your spouse’s income is included even if you file separately. (These simplified calculations do not take into account potential interest subsidies from the PAYE or REPAYE programs.)
For those with higher incomes, it can also be costly to get married from a tax and student loan perspective.
Let’s start with taxes. The “marriage tax penalty” occurred somewhat more frequently when the combination of the wages of both spouses pushed them into a higher tax bracket. The current tax code of 2021 mainly levies the penalty only against high incomes in the 37% tax bracket. Single tax filers earning more than $ 523,600 fall into this bracket, as do married couples earning more than $ 628,300. However, that threshold could be lowered under the Biden administration, which may give some high-income earners a reflection on the price the marriage could ultimately cost them, even if you file separately.
Then, if those same high-income earners also have significant student loan debt, it could be a double whammy of increased monthly debt payments and more taxes. It is not uncommon for high income earners, especially lawyers and medical professionals, to have loans as well.
Marriage has some built-in protections depending on your state’s inheritance and family laws. Filing for a marriage license often means that your spouse is legally able to make medical decisions if you can’t, visit you in the hospital, and inherit your estate.
But it can also be handled quite easily for unmarried and engaged couples – it just takes a little more paperwork. Many of the rights accorded to married couples can be covered by cohabitation agreements, power of attorney, advanced health care guidelines, and proper estate planning. Even some insurance plans cover national partners. Unfortunately, Social Security benefits are probably not something that can be passed on to an engaged but unmarried partner.
For those who choose to get married even after doing the math, it stands to reason that you should complete a bit of extra paperwork yourself, i.e. a prenuptial agreement.
Before legally attaching yourself to someone else, it’s perfectly reasonable to take a break and make sure that a marriage license actually makes the most financial sense for you. People will always push away what is considered out of the ordinary, so don’t let the pressure of “getting married already” get in the way of what works best for both of you.
Erin Lowry is the author of “Broke Millennial”, “Broke Millennial Takes On Investing” and “Broke Millennial Talks Money: Stories, Scripts and Advice to Navigate Awkward Financial Conversations”.
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