With Valentine’s Day around the corner and Cupid pulling out his bow and arrow, marriage proposals can’t be far behind. The cost of the wedding is the easiest part. The legal act of marriage, as compared to living together, could have a big impact on two people’s financial situation- as they say, for “better or worse.” Here are some of the key areas you should review before becoming engaged.
Income Taxes. If person A and person B get married by 12/31 of the year, they are married for tax purposes for the entire year. They can file a joint return or they can file married filing separately. Generally, there is no advantage to filing separately, but sometimes there is. Let’s assume they fille married filing jointly (“MFJ”). Normally, there is no “marriage tax penalty” for MFJ vs. two single returns. However, there can be differences, particularly if both A and B have significant income. If, on the other hand, A has significant income and B has little or none, there may be a substantial marriage tax benefit up to 6% as compared to filing two single returns. You need to check it out or have your CPA or wealth manager check it out for you.
Insurance. Let’s look at health, home, auto and long-term care.
Health Insurance. If A and B are both working and their employers provides health insurance, there may be an opportunity to get better coverage at a reduced rate at one company. Do a side-by-side comparison. Alternatively, if A or B is not working and getting subsidies on health insurance, that will likely go away as once you are married, your joint income is used for subsidies. If A and B earn more than $70k combined, they will not be eligible for Affordable Care Act subsidies.
Home Insurance. Home insurers sometimes factor in marital status for determining premiums. Some offer a 5% flat discount. Check it out.
Auto Insurance. Here the biggest impact is for young people. Some insurance companies charge 20-26% less for married individuals. However, the deep discount reduces as you get older.
Long-term care insurance. Married couples also get big discounts, perhaps as high as 40% over singles. The concept is that spouses are likely to care for each other at home whenever possible, while a single person might not have that option.
IRAs, Social Security and Pensions. Individuals may contribute $6,500 to an IRA (or $7,500 if age 50) as long as they have earned income of that amount. However, married individuals may use earned income of their spouse to meet that test. So, if a couple has $15k or more of income and is 50 or over, they can each make a $7,500 IRA contribution. Both A and B can also maximize their own 401k plans ($22,500 each if under 50, $30,000 each if 50 or over).
There are major social security benefits that accrue when one spouse dies. If the couple was married at least 9 months, then the survivor can “take over” the social security account of the deceased. If both were taking social security at the time of death, the survivor has the choice to use their social security account or the deceased’s account, whichever is larger. If the survivor is under full retirement age (“FRA”) (e.g. someone born in 1960, FRA is age 67), then starting before that time will discount the payments by up to 29%, which will carryover for the rest of their lifetime. In no case, except disability, can social security for the survivor start before age 60.
Single-life pensions can generally be adjusted for survivor benefits. For example, a Single Life pension payment of $3,000 might be adjusted to $2,700 per month if you elect a 50% survivor benefit ($1,350 per month to the survivor). However, if the survivor is significantly younger than older spouse, there will be a much larger reduction in the monthly payment, such as $2,000 per month, for the survivor. You need to check it out and get proposals from the insurance company.
Debts and Liabilities. If your spouse declares bankruptcy, cheats on your MFJ tax return or hurts someone in a car accident, you may be jointly liable. Sometimes married couples create separate revocable trusts to separate their assets and liabilities, particularly if one spouse has an occupation that might result in personal liability exposure.
Estate Taxes. Lifetime gifts are allowed without tax between spouses. Furthermore, when one spouse dies, their estate can give amounts to the surviving spouse and these payments generally qualify as deductions on the deceased’s estate tax return. Of course, the lifetime gift tax exemption is currently $12.9 million per person, though that amount is scheduled to be reduced in 2026. IL has a $4 million exemption and SC has no estate tax.
If IRAs are bequeathed to the spouse, the spouse can make those IRAs (and Roth IRAs) their own, investing them as IRAs for the rest of their life. IRAs bequeathed to non-spouses must be distributed, under current law, within 10 years of the death of the deceased spouse.
What if the marriage doesn’t work out? 45% (about 135 million) of adult Americans are married. About 1.5% of the couples divorce each year. That’s about 900,000 women and 900,000 men who divorce each year. At the time of divorce, assets and income of both spouses will be looked at. We are not attorneys and cannot and do not provide legal recommendation. Therefore, we suggest that any couple considering marriage should each meet with an attorney and consider agreeing to a pre-nuptial agreement. Such an document typically covers assets of both parties and alimony issues. The only exception to considering a pre-nup could be couples like my wife and me (married 54 years ago) who had no assets, some small college loans and convinced our romance would last forever, which, I am pleased to report, it has.
Conclusion: If you are considering marriage, both parties should do their due diligence in many ways, including financial matters. Once you’ve both done your homework on this, please discuss it with informed, experienced people that you know and trust, including fiduciaries like DWM, so that the finances of your marriage are understood and accepted by all parties.