Marriage is full of financial surprises, and, for those considering it these days, there's a new one — falling into the net of the federal government's dreadedAlternative Minimum Tax, AMT.
And with more people qualifying for the tax that erases most deductions, you'd think older couples or those embarking on their second or third marriage might decide against a legal wedding.
As it turns out, love trumps money.
“I’ve never had a client make AMT a consideration when thinking about marriage,” says Cicily Maton of Aequus Wealth Management in Chicago.
In fact, financial advisers say that their clients don’t even ask for an AMT calculation before the wedding.
That was the case for clients of Karl Graf, a financial planner in Wayne, N.J.
His clients, a 70-ish couple, owed on the AMT for the first time. Although the husband is semi-retired and of modest means, his new wife’s income includes pension benefits from her deceased first husband, pushing their combined income to $230,000.
Graf, who is subject to the AMT, said he decided not to bring up the issue beforehand.
"If you're letting a tax tail wag your life dog, you probably shouldn't be getting married," Graf said. In the end, his clients owed $1,800 in AMT.
Created in 1969, the AMT isn’t indexed for inflation, so as incomes have increased, more people wind up falling into a system originally created to target high-income taxpayers.
What's more, the AMT hits married couples particularly hard. For the 2011 tax year, 6.1 percent of married couples will pay the AMT, according to an estimate by the Tax Policy Center, a joint initiative of the Urban Institute and Brookings Institution. In addition, married couples are nearly six times as likely as single taxpayers to trigger the AMT.
The wedding party will grow even larger in 2012, if Congress does not enact what's become an annual ritual of raising the threshold.
Without the so-called "patch," some 30 million Americans could qualify, including almost one in two married couples, according to the tax center.
"You don’t know until you do your tax return whether it’ll affect you," says Roberton Williams, a senior fellow at the Urban-Brookings center. "It's always a case-by-case situation." The AMT is “very unpredictable," he adds.
Generally, however, he says taxpayers with $200,000 to $500,000 in taxable income, those who pay high real estate, state and local taxes and those with children are hit hardest.
The AMT hurts newlyweds for a simple reason: The various limits for couples are less than double those for single filers. That bite often comes on top of the marriage penalty under the ordinary tax.
Consider two taxpayers, each at the top of the 28 percent bracket, earning $200,000 with typical deductions. Married, they’d owe an extra $8,000 in ordinary tax in 2012. Their AMT bills would jump about $7,000, calculates financial planner Tom Davison of Summit Financial Strategies in Columbus, Ohio, bringing the total marriage penalty to $15,000.
When Williams looked at some plausible scenarios, he found marriage penalties starting around $3,700 (see the bottom line of the chart).
For instance, a woman who earned $100,000 and claimed two children under age 17 as dependents might take no itemized deductions as a single filer. If she were to marry a man without children who earned $150,000, their combined marriage penalty would have been more than $9,000 in 2011. (The calculation assumes the man has no children, receives $25,000 in dividend income, pays $20,000 property tax and $24,000 of mortgage interest, and donates $5,000 to charity.)
What if you want to keep both your homes after marriage? Real estate taxes tend to push people into the AMT, because they are deductible under the regular tax regime but prohibited by the AMT law.
So for all you romantics out there, there are a couple of practical moves you can make.
One solution, albeit a small one, is to create a home office, which would allow you to deduct part of the real estate taxes on your property as a business expense allowable under the AMT.
Another strategy is to delay income or your wedding, especially if you were thinking of a late December or early January affair. Some costs — such as state taxes— are deductible under normal circumstances, but not the AMT, so you’ll want to pay those when they’re deductible.
The timing could be significant if one partner expected a change in income, perhaps a bonus, notes Martin Shenkman, a tax planner and attorney with offices in New Jersey and New York.
The shortcoming, however, is clear. Most of these tactics will only work for one year.
And, as with most things involving taxes, there's always hope.
"The election this November could have a profound impact," observes Shenkman. "You could defer your marriage, and then find your tax rate has changed in 2013."