Couples with disparate incomes

[G8tr]

It's been a while since I last posted, but I'm struggling with a tax burden issue. Specifically, my DW earned substantially more than me in 2022 because she's in a sales related field. I'm very happy for her (and us). I didn't too too bad myself, but if we were single I'd be a tax bracket lower than her. Unfortunately, this tagged me (us) with the dreaded marriage penalty, resulting in a large tax bill. She tried to head this off last year by taking out extra withholding. I didn't because I thought I'd be fine from a withholding perspective. I used our tax software for me individually and that supported my theory, but when I added her income, our tax bill ballooned despite her additional withholding.

We keep our finances separate, but contribute to a joint account for bills. Splitting our large tax bill evenly seems odd due to her greater income pushing us into the next tax bracket. In the end, we will probably just need to have a discussion about it and see where that takes us.

 

[HF63]

We been marry for 38 years always kept separate or individually accounts for everything.I made more and paid more of the bills but it work out for us.


In regards to taxes, can you file separate or do a what if scenario to show her your thoughts.

 

[MarieIG]

Hmmm, if DW figures her tax first, does having your income top push her into a higher tax bracket? Sounds as if you should have taken additional withholding as well.

Perhaps run the numbers for filing separately.

When we were both working, due to his overtime, DH made more money than I did, but we both raised our withholdings.

But seriously, discuss it with her. A lot of couples have extremely disparate incomes; with the one earning more contributing more - well - because they can.

Good luck.

 

[G8tr]

Hmmm, if DW figures her tax first, does having your income top push her into a higher tax bracket? Sounds as if you should have taken additional withholding as well.

Perhaps run the numbers for filing separately.

When we were both working, due to his overtime, DH made more money than I did, but we both raised our withholdings.

But seriously, discuss it with her. A lot of couples have extremely disparate incomes; with the one earning more contributing more - well - because they can.

Good luck.

No, my income doesn't push her into a higher bracket. But you're correct, I probably could have withheld more myself. In looking at the percentage of income withheld by each of us, mine is lower due to her extra withholding. So I planned to pay that part of the tax bill to be at an equal tax percentage burden.

Unfortunately, our tax bill is still substantially higher than that. I don't quite know how to allocate the remaining balance. I think the income disparity is the cause, so I think it's odd to just split that amount. Again, I'll talk to DW about it and see what happens.

All of this notwithstanding, I know my income will be much higher this year, so I'll start additional withholding now to avoid the same surprise next year.

Taxes suck, but I guess they're a good problem to have until FIRE.

 

[RobbieB]

My first wife and I kept separate finances too. I made 2X what she made, so we did the 1/3-2/3 split on everything.

 

[COcheesehead]

I went through something similar. I earned a lot. My wife earned little, but was self employed and only paid estimated taxes on her income which did not cover much. I paid the rest. Happy wife, happy life.

 

[MarieIG]

No, my income doesn't push her into a higher bracket. But you're correct, I probably could have withheld more myself. In looking at the percentage of income withheld by each of us, mine is lower due to her extra withholding. So I planned to pay that part of the tax bill to be at an equal tax percentage burden.

Unfortunately, our tax bill is still substantially higher than that. I don't quite know how to allocate the remaining balance. I think the income disparity is the cause, so I think it's odd to just split that amount. Again, I'll talk to DW about it and see what happens.

All of this notwithstanding, I know my income will be much higher this year, so I'll start additional withholding now to avoid the same surprise next year.

Taxes suck, but I guess they're a good problem to have until FIRE.

Not sure if the IRS determines who pushes whom. Wouldn't they just look at the earnings as one pot?

In any event, as an example, if the entire tax liability is $100; and she earns 70%; she could pay $70 and you $30 (giving each credit for what they paid throughout the year)?
But - math is not my strong suit.

 

[Jerry1]

Not sure if the IRS determines who pushes whom. Wouldn't they just look at the earnings as one pot?

In any event, as an example, if the tax bill is $100; and she earns 70%; she could pay $70 and you $30? But - math is not my strong suit.

This is similar to what I was thinking. Why isn’t it you who pushed your DW into the 22% tax bracket? Personally, I think if one is married, there’s only “our” money, but certainly it’s not always that way.

A fair distribution could be based on your income. Kind of like Robbie indicated - if you make 40% of the money, then pay 40% of the tax. To get more refined, someone would have to concede the issue of who pushed whom into the next tax bracket. Since even though you have separate money, you both benefit from the income and for the sake of your marriage, I’d recommend splitting the tax even, as it seems as that is what you’ve historically done.

 

[pb4uski]

It's been a while since I last posted, but I'm struggling with a tax burden issue. Specifically, my DW earned substantially more than me in 2022 because she's in a sales related field. I'm very happy for her (and us). I didn't too too bad myself, but if we were single I'd be a tax bracket lower than her. Unfortunately, this tagged me (us) with the dreaded marriage penalty, resulting in a large tax bill. She tried to head this off last year by taking out extra withholding. I didn't because I thought I'd be fine from a withholding perspective. I used our tax software for me individually and that supported my theory, but when I added her income, our tax bill ballooned despite her additional withholding.

We keep our finances separate, but contribute to a joint account for bills. Splitting our large tax bill evenly seems odd due to her greater income pushing us into the next tax bracket. In the end, we will probably just need to have a discussion about it and see where that takes us.

I don't get the "dreaded marriage penalty"... seems like a myth to me. Using https://www.irscalculators.com/tax-calculator take a hypothetical couple where she earns $200k and he earns $50k. 2022 federal income tax on:

Single with $200k wages:.$40,087.50
Single with $50k wages:......4,240.50
Combined.......................$44,328.00

MFJ with $250k wages......$41,455.00

So if they cohabitated unmarried their combined tax is $44,328 but if they are married it is $41,255... seems like a marriage benefit to me.

So while DW and I had that situation our finances were combined, if your finances are separate then you have a few different approaches to allocate the income taxes... you could do it based on the single filing results and that would be $37,489 to the $200k earner and $3,966 to the $50k earner.

I think the fairest approach is to share tax on the first $100k of income equally with the tax on the next $150k assigned to the higher earner. The tax on $100k of joint income would be $8,236 so that would be $37,337 to the $200k earner and $4,118 to the $50k earner.

 

[TheWizard]

Pb is correct.
Not a marriage penalty, just higher income ---> higher taxes.
Proper withholding should have covered much of the increase and gotten you to safe harbor.
Just pay the remaining balance due and enjoy...

 

[youbet]

I don't get the "dreaded marriage penalty"... seems like a myth to me. Using https://www.irscalculators.com/tax-calculator take a hypothetical couple where she earns $200k and he earns $50k. 2022 federal income tax on:

Single with $200k wages:.$40,087.50
Single with $50k wages:......4,240.50
Combined.......................$44,328.00

MFJ with $250k wages......$41,455.00

So if they cohabitated unmarried their combined tax is $44,328 but if they are married it is $41,255... seems like a marriage benefit to me.

The so called Marriage Penality comes into play where the partners make similar incomes, say $125k each.

 

[ut2sua]

No, my income doesn't push her into a higher bracket.

OP, nice try, but everyone knows this ^^^ is not correct

 

[youbet]

OP, nice try, but everyone knows this ^^^ is not correct

When you file MFJ, you are giving up individual brackets altogether. You're agreeing to combine incomes and the other details and then submit yourselves to the IRS's unique brackets and rules for MFJ filers.

 

[pb4uski]

The so called Marriage Penality comes into play where the partners make similar incomes, say $125k each.

No, that is also a myth. The tax on a single with $125k of wages is $20,727.50, exactly 1/2 of the $41,455 tax for MFJ couple with $250k of wages.

Check it out at https://www.irscalculators.com/tax-calculator

 

[Sunset]

I know one marriage penalty for taxes:

Excess Capital Loss Marriage Penalty:
Both single taxpayers and married taxpayers filing jointly may only deduct, on an annual basis, up to $3,000 of capital losses above their capital gains against their ordinary income.

A married couple gets to deduct $3K , which is 1/2 the amount per person that a single person gets to deduct.

 

[FLSUnFIRE]

I don't get the "dreaded marriage penalty"... seems like a myth to me. .

When I got married, we did pay more (mostly due to her losing the standard deduction when I was already itemizing) and were "penalized." That said, overall, I think single people are much more burdened ... mostly due to tax thresholds doubling for married while living expenses do not increase linearly (and in some cases can go down on a per-person basis). Purely financially, if I could marry my financial clone, the two of me would both be better off tax wise!


To the OP, when married, we kept separate as well with a joint account we funded proportionally based off of after-tax income (varied from 2:1 to 1:1).... taxes were paid by the earner through payroll deduction. Small refunds on the joint return just went into the "us" account. We weren't super anal about it but margin of error was probably less than $500 one way or the other.

 

[Dtail]

I earned substantially more than my ex wife, but always had one pool of monies for everything.

 

[Badger]

After having money placed into our 403b accounts we pooled the rest into one joint account for bills then transferred equal "allowances to our separate accounts for personal expenses. Worked for us and we have never had an argument over money.
When we paid off our mortgage there was no benefit to itemize deductions anymore so for the past 20+ years it has been standard deduction. A few times over the years I did a quick check of the differences between MFJ and filing individually. I never saw a difference that mattered.

Cheers!

 

[pb4uski]

I know one marriage penalty for taxes:

Excess Capital Loss Marriage Penalty:
Both single taxpayers and married taxpayers filing jointly may only deduct, on an annual basis, up to $3,000 of capital losses above their capital gains against their ordinary income.

A married couple gets to deduct $3K , which is 1/2 the amount per person that a single person gets to deduct.

Fair point but at 24% marginal the disadvantage is only $720 at most, so not a huge deal.

 

[HarveyS]

No, my income doesn't push her into a higher bracket.

But, adding your income to hers increased her effective tax rate, no? In my world I don't pay the bracket, I pay the effective.

It sounds like you are worried about who has to write the check for tax due to the IRS.

IMO you are being too detailed about this. If your combined effective rate is 18.5%, you should both pay 18.5% of your income. The amount you each pay is either by (1) withholding or (2) withholding and writing a check. And, if one person withheld too much, the other needs to "refund" that difference. If there are tax penalties for under withholding those should be paid by the person that under withheld.

Maybe you made a mistake in your tax-planning. Easy to do. If so, you should own that mistake and make good on any error. Arguing over a few hundred dollars one way or the other isn't worth it.

 

[athena53]

IMO you are being too detailed about this. If your combined effective rate is 18.5%, you should both pay 18.5% of your income. The amount you each pay is either by (1) withholding or (2) withholding and writing a check. And, if one person withheld too much, the other needs to "refund" that difference. If there are tax penalties for under withholding those should be paid by the person that under withheld.

I was going to suggest something similar. You may also want to look at filing separately- just remember that you can't game the system with one taking the standard deduction and the other taking all the itemized deductions. In NJ years ago my then-husband and I saved with that tactic, not on Federal, but on State which more than made up for the Federal hit. We could file separately for State only if we did so for Federal and it kept us from paying the highest State marginal rate on 100% of one of our (roughly equal) incomes when they were "stacked".

 

[Retired Expat]

Relatively new marriage to the woman I have been with 12 years now. Went into the relationship with eyes wide open. She has assets but not a lot of income but she pays all her own bills. I pay mine and our joint bill for the house and such, food, utilities, travel etc. My income is substantially more than hers, but this is it for me so I don’t bother to worry about who paid what. Most everything I have will become hers when my time comes anyway!. On the flip side she is frugal, and careful with money and great about understanding cash flow and timing of expenditures, un like my ex who spent like crazy.

Nice to be at a time of life and in a financial position to not to have to worry about this stuff! I have no kids but she has a daughter so what doesn’t go to my wife will go to my step daughter

 

[swakyaby]

I’ve been married 33 years, and our widely disparate incomes have swung both ways. Initially, my income was a meager stipend and coupled with a large educational loan debt while DH earned 4 times what I earned. He paid nearly all our bills snd mortgage while I paid my personal expenses, had only a small tax withholding, and began repaying my loans.

Then my professional career took full swing and my income became 8 to 10 times what DH earned. I took over nearly all household expenses, paid off the mortgage, paid estimated taxes of nearly 90% total tax owed. So yes, it makes sense that when there is a large difference in income, the taxes should be proportional, to a rough degree.

 

[swakyaby]

I would consider it fair if your DW paid any extra taxes owed from her individual account instead of the joint account, but that’s just my opinion.

 

[Koolau]

It's been a while since I last posted, but I'm struggling with a tax burden issue. Specifically, my DW earned substantially more than me in 2022 because she's in a sales related field. I'm very happy for her (and us). I didn't too too bad myself, but if we were single I'd be a tax bracket lower than her. Unfortunately, this tagged me (us) with the dreaded marriage penalty, resulting in a large tax bill. She tried to head this off last year by taking out extra withholding. I didn't because I thought I'd be fine from a withholding perspective. I used our tax software for me individually and that supported my theory, but when I added her income, our tax bill ballooned despite her additional withholding.

We keep our finances separate, but contribute to a joint account for bills. Splitting our large tax bill evenly seems odd due to her greater income pushing us into the next tax bracket. In the end, we will probably just need to have a discussion about it and see where that takes us.

We have some separate investment accounts because that's the way the gummint has them set up - namely 401(k) and tIRAs and Roths. Other than that, we don't separate anything.

But in the case of OP, why not calculate OP's share and DW's share of the taxes based on share of income that created the total tax bill? Subtract from that amount each person's withholding. Pay the remaining bill or split the refund accordingly. I'd forget about who made the most and "pushed" the duo into the higher tax bracket. What's a thousand or two between two people in a couple? Of course, YMMV.