Maximizing the Financial Benefits of Marriage

While many people appreciate the emotional and social components of marriage, the far-reaching financial benefits are sometimes overlooked. To reap these economic rewards, couples should first identify their unique financial goals and situations. Maximizing the financial advantages of matrimony involves understanding tax benefits, optimizing joint finances and recognizing other financial perks. A financial advisor can help you optimize your finances and capitalize on the fiscal benefits of marriage.

Understanding the Tax Benefits of Marriage

Marriage offers unique tax benefits that can help couples build more wealth over time. After all, married Americans between the ages of 51 and 60 have nearly twice the financial assets of people who are divorced or never married. According to an analysis by American Enterprise Institute, married couples on average have a combined $643,000 in household assets, while the unmarried and divorced have just $167,000.

Is the Marriage Penalty for Taxes Real?

Many couples contemplating marriage are understandably wary of the so-called marriage tax penalty, which arises when a married couple incurs a higher tax rate when filing jointly compared to filing separately. In other words, their combined income taxes exceed the sum they would pay if they were filing individually. This typically occurs when both partners have similar incomes.

However, marriage can also offer tax breaks, especially when there’s a significant disparity in earnings. In this case, the couple’s joint tax liability may end up being lower, particularly if their combined income places them in a lower tax bracket than if they filed individually. To accurately evaluate the tax implications of marriage, seeking guidance from a financial advisor or tax professional is essential.

Is There a State Marriage Penalty?

It’s also worth noting that some states impose their own marriage penalties in their tax codes. Therefore, it’s crucial for couples to examine local tax laws to ensure they fully understand the impact of matrimony on their taxes. Fifteen states levy some form of a marriage tax penalty:

California
Georgia
Maryland
Minnesota
New Jersey
New Mexico
New York
North Dakota
Ohio
Oklahoma
Rhode Island
South Carolina
Vermont
Virginia
Wisconsin

Is Marriage Worth the Tax Break?

The answer to the question will ultimately depend on a couple’s unique financial situation. With that said, 95% of married couples opt to file their taxes jointly, according to Nolo. Marriage offers access to valuable credits and deductions, but it’s crucial for couples to evaluate their specific financial situation to gauge the true impact. In the end, the tax break can be an appealing aspect of married life, but it should be considered alongside the broader financial advantages and personal fulfillment that a marriage can offer.

How to Optimize Your Joint Finances

There are several tactics that married couples can employ to optimize their finances and take advantage of the financial benefits that matrimony provides.

Here’s a look at some of the strategies and ways in which married couples can better their financial lives.

Joint Bank Accounts

Joint bank accounts can streamline money management and enable easier access to shared funds. However, they could also complicate individual financial independence. Before choosing to merge their finances, couples should weigh the pros and cons and possibly consult a financial advisor to identify the best course of action for their specific circumstances.

Increased Borrowing Power

By combining their income and credit scores, married couples can boost their borrowing power. This can potentially lead to more favorable loan terms or interest rates. However, it’s crucial to be aware of the potential risks associated with heightened borrowing power and make responsible decisions when taking on debt.

When Karen and Steve decided to buy their dream home, being married offered increased borrowing power. Had Karen and Steve applied for mortgages individually, they might have struggled to qualify for the loan amount they required or secure favorable interest rates.

File Together for Income Tax Benefits

Joint income tax filing can yield a lower tax liability for married couples, particularly if they have dependent children. Meanwhile, married couples have a standard deduction that’s twice the value of a single person’s standard deduction. In 2023, married couples filing jointly can deduct $27,700 of their combined income. Single tax filers, on the other hand, only deduct $13,850.

Social Security Benefits

Married couples can also claim Social Security benefits based on one of the spouse’s lifetime earnings. These spousal benefits are worth up to 50% of what the other spouse is owed at full retirement age (FRA). As a result, if one spouse’s Social Security will be worth considerably less than the other’s, filing for spousal benefits may be advantageous.

Consider Tom and Mary, a married couple, who were both approaching retirement age. After consulting the Social Security Administration, they learned that Tom could claim spousal benefits based on Mary’s earnings because they had been married for over a year and met the necessary criteria.

By doing so, Tom was able to receive 50% of Mary’s Social Security benefit amount, leading to a combined higher monthly benefit for the couple and enhancing their financial stability in retirement. This additional income provided Tom and Mary with more financial freedom and allowed them to maintain a comfortable lifestyle throughout their golden years.

Combined Health Insurance

Merging health insurance policies can result in lower premiums or more comprehensive coverage. By selecting the best plan for their family’s unique needs and negotiating better rates, married couples can optimize their healthcare expenses. However, keep in mind that not all plans allow spouses to enroll if they have access to their own coverage. Thoroughly comparing health insurance options and seeking professional advice is essential to make the best decision for the family’s needs.

Invest for Retirement

Married couples who file their taxes jointly have the unique ability to contribute to a spousal IRA if one spouse doesn’t work. This allows the non-working spouse to save for retirement on either a pre-tax or Roth basis using contributions from their spouse. Like regular IRAs, the contribution limit for a spousal IRA in 2023 is $6,500 or $7,500 for people 50 or older.

Plan Your Estate as a Married Couple

Estate planning is a critical step for married couples, ensuring that assets are distributed according to their wishes while minimizing estate taxes and probate costs. Regularly updating estate plans as circumstances change can ensure that assets pass to the intended beneficiaries.

After consulting an estate planning attorney, Maria and James learned that, as a married couple, they could take advantage of unlimited marital deductions. This meant they could transfer an unlimited amount of assets to each other tax-free, both during their lifetime and at death.

Doing so allowed Maria and James to avoid taxes on any gifts or bequests they made to each other, effectively increasing the efficiency of their wealth transfers and estate planning efforts. This strategic financial planning enabled them to preserve more of their wealth for themselves and their descendants.

Other Financial Benefits of Marriage

Marriage can positively influence various financial aspects, such as:

Buying and Selling a Home: When buying or selling a home, marriage can prove advantageous as it enables couples to pool their resources, credit scores and negotiating power, thereby securing more attractive mortgage terms or sale prices.
Gift and Estate Tax Provisions: Married couples can benefit from unlimited marital deductions, which allow them to transfer an infinite number of assets to their spouse tax-free, both during their lifetimes and upon death.
Insurance Planning: By consolidating auto, home or life insurance policies, married couples can save on insurance costs and may qualify for additional discounts or benefits. For example, Geico offers a multi-car discount of up to 25% when insuring two or more vehicles. If both spouses own vehicles, this can result in significant savings.
Spouses May Qualify for More Benefits: Married couples may qualify for additional financial aid through the Free Application for Federal Student Aid (FAFSA), as it considers the combined income and assets of both spouses in determining financial aid eligibility. Meanwhile, a military spouse may be eligible for education, health care or shopping benefits through Defense Department programs, like the Post-9/11 GI Bill and the TRICARE health care system.

Bottom Line

There’s no denying that marriage offers numerous financial benefits, including tax advantages, joint finance and additional financial opportunities. Each couple should carefully evaluate how each financial benefit applies to their unique situation to maximize their collective financial growth. Consulting with a professional is essential to ensure that you’re fully capitalizing on the wealth of financial benefits that marriage provides for your specific situation.

Tips for Managing Assets

Whether you’re married or not, you’ll need to create a plan for your assets so that you can maximize their value and long-term potential. If you’re not sure where to start, a financial advisor could help walk you through the whole process and even manage your assets for you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
You can use a tool, like SmartAsset’s investment return calculator, to help you understand what your assets could potentially look like down the road.