Personal Finance

Money Matters: Change in tax filing status could mean bonus or penalty for newly weds

Q. My fiancé and I are planning a wedding in Las Vegas over the holidays. We are both marrying for the third time and we don’t want a big wedding so we think this is perfect. A buddy of mine is a tax guy and told me if I’m going to marry (he thinks based on our track records we should just live together) I should wait until New Year’s Day to avoid the marriage penalty and save on federal taxes for 2015. He said it’s kind of like buying a mutual fund at year end – better to wait until the first of the year. I don’t know how marriage, mutual funds and taxes relate but he’s a pretty smart guy when it comes to money. It doesn’t matter to us if we marry late December or early January but don’t understand how this decision would impact our 2015 taxes. It might make some difference but it can’t be that much. Do you think we should have a January wedding versus December or does it matter?

A. Congratulations on your engagement and upcoming wedding! I don’t think the decision to buy mutual funds or get married at the end of the year have much in common but each do have some potential tax consequences.

When a couple marries they may face increased or decreased taxes based on the change in filing status from single or head of household to married filing jointly. This is commonly referred to as a marriage bonus or penalty.

The following is a simplistic example of how a married couple may pay more than a non-married couple: Assume both individuals make $205,750/year. If they each file single they will have the full personal exemption of $4,000 and the standard deduction of $6,300. They will each have taxable income of $195,450 and owe $48,105 in federal income tax. As an unmarried couple they will pay a total of $96,210 ($48,105). Only $6,149 of their income falls into the 33 percent tax bracket. If this same couple is married and files jointly their personal exemption is reduced to $1,440 and they will pay a total of $106,691 in Federal income tax. Now $178,349 of their income falls into the 33 percent tax bracket. By filing as a married couple they will pay $10,481 more in federal income tax than if they had not married and kept single filing status. If your incomes are low, you may pay the same or less if married and filing jointly. If you are in a high tax bracket (over 15 percent) you will probably pay more tax. Have your buddy run some numbers for you as his wedding gift. If in a high tax bracket, delaying your marriage until 2016 may pay for all or most of your trip to Vegas.

Your buddy is also correct that you need to be cautious when buying mutual funds at the end of the year. Mutual funds are required to pass on profits from selling stock and bond holdings to their shareholders. These profits are called capital gain distributions. Mutual fund investors are taxed each year on a fund’s distribution if they are invested in fund as of the “record date”. The distributions are taxable whether you have held shares in the fund for a week or a year and whether you reinvest them or take them as cash. The only exception is if the fund is held in a tax-sheltered account such as an IRA. You should avoid buying prior to the distribution or “record” date to minimize tax liability. Call the mutual fund companies you are considering and ask for the record date of the specific fund in which you plan to invest. Buy the fund after the record date and you will not receive these taxable distributions. A large number of funds pay out capital gains in August and September but most wait until late November or December. An index mutual fund or an exchange traded fund will have fewer distributions than an actively managed fund.

Hope you have fun in Vegas and have a long life together whether you decide to marry this year or next!